How T. Rowe Price Is Poised to Outperform the Market

In this clip from "The Rank" on Motley Fool Live, recorded on Feb. 7, Motley Fool contributors Matt Frankel, Jason Hall, and Taylor Carmichael discuss why T. Rowe Price (TROW -2.01%) remains a highly favored dividend stock and could potentially outperform the market given its strong track record.

Matt Frankel: This is a company that many investors are at least familiar with from a customer standpoint. They are one of the biggest mutual fund providers in the world. I'm not sure if they are the biggest, but they have to be up there when it comes to actively managed mutual funds. I know Vanguard is probably the largest mutual fund company because they've trillions and trillions of dollars.

Jason Hall: It's the indexes though.

Frankel: Right. The majority of fund investors are in index funds through retirement plans, things like that. But T. Rowe Price, they are a massive company. They've almost $1.7 trillion of assets under management. To put that in perspective, Goldman Sachs (GS -0.71%) is in the $2 trillion range firmwide, so this is a pretty large operation and they're growing impressively. People are gravitating toward their funds these days. We've pretty much been in a bull market for 12 years with a mild interruption during the COVID pandemic and very recently. The market's performed really well. As the market performs better, companies that make their money from charging a fee based on assets under management see their fee income go up. If the market goes up by 20% per year, T. Rowe Price's fee income is going to go up by that. Over the past year, their revenue went up 24% mostly because of market performance. Their earnings went up even better, 32% year-over-year because their revenue grew faster than their expenses. It's been a fantastic performer over the years. Let me just quickly share my screen. This is a chart of T. Rowe Price's performance since its IPO in the mid 1980s. Can you guys see that?

Hall: Yeah.

Taylor Carmichael: Yeah.

Frankel: 18,700% return since the mid 1980s. That's a pretty impressive long-term track record.

Hall: I've got another track record here. It's increased its dividend every year for 35 straight years.

Frankel: It's been a great dividend payer. You can see recently the performance has been not so great, but can't we say that about most of the stocks we follow?

Hall: Right.

Frankel: Just to go into why they've been under-performing. A few different things. One, it was a bad year in 2021 for actively managed mutual funds. I mean, look at the performance of the S&P 500 (SNPINDEX:^GSPC) and Dow Jones (DJINDICES:^DJI) versus some of the stocks that we like so much. It was a really bad year to be a stock picker as most people listening here have found out. It was a really good year to be an index fund investor because they dramatically outperformed most individual investors. Being one of the largest providers of actively managed mutual funds, not all of their funds are actively managed, but that's a big focus of theirs. That's their differentiator. It wasn't a great year for a lot of their funds. No. 2, we saw a lot of outflows from their funds. Not a lot based on the $1.7 trillion figure I mentioned. But throughout 2021, net outflows, meaning, more money went out than went into their funds, $28.5 billion of investor money was pulled out of funds. Now, a lot of this is because the market's done really well. It's pretty much been straight up since it bottomed in March 2020 through very late 2021. In periods like that, it's natural to see a lot of investors tap into their accounts, start pulling a little bit of money out, but still not really what you want to see as an investor. I think T. Rowe Price has a fantastic track record of being a great dividend payer, of being a generator of assets under management, and therefore a generator of revenue growth. I don't really see that changing. I don't think they're going to return 18,000% over the next 40 years like they did over the last 40. It's still going to be, I think, a market out-performer and that's why I ranked it toward the high end. Guys?

Hall: I'll just say real quickly and then Taylor you can have the last word. I generally agree with you Matt on everything you said. I think it's easy to under-appreciate how its ability to capture more assets under management can also generate operating leverage. It's that last dollar can be more profitable than the first dollar model. In the near-term, I am concerned about continued revaluation of the market over the next year or two as multiples come down. That could weigh on its returns. That could weigh on its assets and its results. But over the long term, I think it's going to continue because these guys have done it in every potential market environment and I think that's likely to continue to be the case. Taylor?

Carmichael: Yeah. I'm not negative on T. Rowe Price. It's just when I was looking at all of these stocks, we had a lot of tech stocks actually that got hammered. I typically put all the tech stocks over something like T. Rowe Price, which is a pretty conservative investment. I think it probably will be, well, I don't even know if it will beat the S&P 500 over the next 10 years. It might. It might not. They have amazing margins, 40% margins. I question whether they have a lot of growth, whether there's still a growth story. To me, I don't know. It's interesting. We're going through a really interesting time in the financial markets with crypto and, as far as I know, T. Rowe Price is not involved in crypto at all and so they are more conservative on that. I might be wrong on that. I'm not an expert on T. Rowe Price. But that's interesting that large numbers of Americans are buying crypto and that people are chasing yield in crypto. I wonder if some of these old school banks and financial services firms might take a hit from that if they don't transform because I'm a big believer in where crypto is going to take us. That would be a back of a mind question. Obviously, if you don't believe in crypto or you think it's crazy, then you will probably love T. Rowe Price. That's where you come down on that. Are you a crypto guy or do you think it's crazy? Because these guys seem to me to be very conservative and they've doubled over the last five years. The stock's done a little bit better. It's like 130% or something. It took a recent hit obviously and that didn't include their dividends. If you're looking for dividends, this will be a strong company, but I'm more in the growth end of picking stocks so this is not one for me.