Technology companies are not the only ones to feel the sting from the recent market sell-off. It's impacted other industries, as well, including asset managers.
Asset managers perform well during rising stock markets, but when markets fall, their assets drop with it. Also, they typically get hit with outflows as investors pull their money out or move it around. Both of these reactions hurt revenue.
So it may not come as a shock that one of the leading asset managers, T. Rowe Price (TROW -0.48%), has had a rocky year so far, given the market environment. The stock is down about 27% year to date as of Feb. 17 and roughly 35% since early November. But there are a few good reasons this stock -- known for its terrific dividend -- remains a good investment.
Rocky markets rock T. Rowe Price
T. Rowe Price is one of the largest asset managers in the U.S. and considered one of the top active managers. Over the past 10 years, it's gained market share and churned out double-digit annual revenue increases, buoyed by a long bull market and superior performance that largely outperformed the benchmarks.
Last year was another strong year, as the stock price finished up 30%, but it plummeted from a high of $224 per share on Nov. 5 to close the year at $196. As of Feb. 17, it was trading at about $144 per share.
The mixed bag for T. Rowe Price in the fourth quarter reflected the volatility of the market. Assets under management were up 15% to $1.69 trillion in the quarter, lifted by market appreciation and the acquisition of alternative investment-manager Oak Hill Advisors, which brought in $57 billion in assets. But those gains were offset by net outflows of $22.7 billion in the quarter, as there was an elevated number of stock-fund redemptions and transfers into other asset classes and less risky portfolios.
Overall, the company has about half of its assets in separate accounts/subadvised assets and half in mutual funds. It also has about 60% of its assets in equity funds/portfolios and 40% in fixed income, multi-asset, and alternative investments.
Assets dropped in January, with market losses and client outflows and transfers the chief culprits. Assets under management fell 6.5% to $1.58 trillion, compared to the year-end number. Equity mutual fund assets dropped 9.2% to $503 billion, while equity separate account/subadvised assets decreased 9.1% to $399 billion. This was related to the overall decline in the stock market.
A Dividend Aristocrat raises its dividend again
Shareholders mirroring T. Rowe Price's clients shifted out of the stock during the January market downturn. But the stock price has leveled off in February and should start moving back up as the market slowly recovers.
But 2022 will be a challenging year. The company expects net inflows in 2022 (as opposed to outflows), but its growth may be below its 1% to 3% target. Combine that with a stock market that likely won't be seeing anything higher than single-digit returns -- or potentially negative ones -- and T. Rowe Price won't see the type of returns it has had in recent years.
However, the company is built to weather this type of downturn with its pristine balance sheet. It's virtually debt-free and has built up tons of cash. Even after using $2.5 billion to acquire Oak Hill last quarter, T. Rowe Price still has $2 billion in cash. It's one of the most efficient companies on the market, with an operating margin of 48% and a return on equity of 37%.
This is why T. Rowe Price is one of the best dividend stocks out there. As of Feb. 8, it raised its dividend for the 36th consecutive year, boosting its quarterly dividend to $1.20 per share, up 11% from the previous quarter. This level of consistency has earned it Dividend Aristocrat status, or those S&P 500 companies that have raised their payouts for 25 years straight or longer. It has an above-average yield of 3.4% and a solid payout ratio of roughly 34%
The sell-off has brought down T. Rowe's valuation with a price-to-earnings ratio of about 11. For income investors, T. Rowe Price is still a no-brainer, given its financials and efficiency. The stock price should move back up, as rate hikes are already being priced in, but don't expect major gains in 2022. As a long-term dividend investment, however, this beaten-down stock is a good buy.