T. Rowe Price Group (TROW 0.01%) is one of the top asset management firms in the U.S. It has gained market share over the years by excelling in active management, an area that didn't do quite as well in general over the past decade. But its excellent performance against benchmarks enabled it to outperform where many active managers over the past decade struggled.
This decade, it is expanding its active-management prowess into the world of exchange-traded funds (ETFs) with the launch of eight actively managed ETFs since last year, four of them in 2021. So far, only one of the four ETFs with at least a one-year track record -- the T. Rowe Price Equity Income ETF (TEQI 0.88%) -- has beaten its benchmark, but it's too early to get a full picture.
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What's clear about T. Rowe Price is that it is one of the best dividend stocks in the financial sector, if not the entire market. And there is one overriding reason for that, which we'll examine.
T. Rowe Price: Dividend Aristocrat
The first thing to know about T. Rowe Price in relation to its dividend is that it's a Dividend Aristocrat, meaning it is an S&P 500 stock that has increased its dividend annually for at least 25 straight years (it's been 34 years in T. Rowe Price's case). It is one of just 52 companies that have done raised the dividend annually for 30 years or more.
At the start of 2021, T. Rowe Price boosted its quarterly dividend to $1.08 per share from $0.90. For the full year, that comes out to $4.32 at a yield of about 2.14%. That's very competitive, higher than the average yield on the S&P 500, which is around 1.3%. Its five-year average yield is about 2.5%.
The dividend has a payout ratio of about 30.9%, meaning it pays out 30.9% of earnings to finance the dividend. That is very manageable and not so high as to take away from other investment efforts.
This year, T. Rowe Price gave its investors a bit more, approving a $3 per share special dividend in the third quarter, in addition to the robust $1.08 quarterly dividend. CEO William Stromberg said the special dividend "reflects the healthy cash position on our balance sheet." That balance sheet is what makes it such a great dividend stock.
No debt, with lots of cash
As Stromberg said, T. Rowe Price can afford to reward its investors with healthy dividends because the company's cash position is so strong "with ample liquidity to continue to execute on our business strategy." Its superpower is that it has virtually no debt with about $3.6 billion in cash and roughly $3 billion in free cash flow.
Free cash flow is a key metric as it is the amount of cash the company has available minus cash outflows to support operations. This gives T. Rowe Price a pristine balance sheet that allows it to invest in itself and reward investors, as it has for nearly 35 straight years now with rising dividend payouts.
The lack of debt and abundance of cash comes from having a very efficient operation, cultivated over years of consistent growth with lower expenses. Its operating margin of 47% and profit margin of 42% are both extremely high and show that the company maximizes its earnings and controls expenses.
There aren't that many stocks out there that can match T. Rowe Price's level of efficiency, but one of the things to look for when assessing dividend stocks is how much debt the company has in relation to cash. More cash than debt speaks to a company's efficiency and its ability to invest in its growth and weather downturns, among other things. But you also want to determine how much in earnings it is paying out in dividends, because a high payout ratio (say, over 65% or 75%) could signal a dividend trap in that the payouts are not sustainable.
T. Rowe Price is right in the sweet spot with a payout ratio of around 31%. And it has the receipts to prove it with a long history of expertly managing its operations and dividend.
