Investors looking to build a steady and growing stream of dividend income should consider adding stocks to their portfolio with competitive advantages as well as size and scale.
With a market capitalization of $32 billion, T. Rowe Price Group (TROW 1.71%) fits these requirements as the ninth largest publicly traded asset manager in the world. Let's explore four reasons why the asset manager looks like an interesting stock for dividend growth investors to consider.
1. T. Rowe Price Group continues to exceed expectations
The company reported its fourth-quarter earnings results late last month for the period ending Dec 31, and those results topped analysts' forecasts for both revenue and non-GAAP (adjusted) diluted earnings per share (EPS).
The company recorded $1.96 billion in net revenue during the fourth quarter, which works out to 13.2% growth over the year-ago period. This beat the analyst net revenue consensus of $1.95 billion, the eighth quarter out of the past 10 that T. Rowe Price surpassed analysts' predictions. What led net revenue to top analysts' projections?
Thanks to the rally in equity markets that occurred last year, average assets under management (AUM) surged 18.6% higher to $1.65 trillion in the fourth quarter. The competitive asset-management environment led the company's annualized effective fee rate to fall from 45.7 basis points in the fourth quarter of 2020 to 43.4 basis points in the fourth quarter of 2021. That explains why the company's net revenue grew moderately slower than its average AUM.
T. Rowe Price Group's non-GAAP diluted EPS increased 9.7% year over year to $3.17 in the fourth quarter. This exceeded the average analyst estimate of $3.12, the ninth quarter out of the past 10 that the company has done so.
Non-GAAP operating expenses grew slightly faster than net revenue, which explains how earnings growth lagged behind net revenue growth. Non-GAAP operating expenses were up 14.7% year over year to $1.04 billion in the fourth quarter, a result of higher costs for compensation and technology development.
Analysts expect that T. Rowe Price's reputation for having most of its funds outperforming their benchmarks and the general upward trend of financial markets bodes well for the company, with 12% annual earnings growth in the next five years.
2. A balance sheet that remains flawless
T. Rowe Price is also one of few publicly traded companies to have a balance sheet that is completely free of long-term debt. And the company has $2.08 billion in cash and investments on top of that.
It paid $4.32 per share in quarterly dividends and $3 per share in special dividends last year, for $1.7 billion in total dividends paid during the full year. So it could choose to pay its dividend from its cash and investments balance if the market crashed for an extended period of time.
3. The recent dividend raise signals confidence
If massive liquidity reserves don't convince investors that the dividend is safe, its low dividend payout ratio is another strength.
The company's regular quarterly dividend payout ratio was 33.9% last year. Even including the special dividend, the payout ratio was still manageable at 57.4%. Since the asset management industry doesn't require much in capital expenditures to run, these are sustainable payout ratios.
T. Rowe Price's strong balance sheet and well-covered dividend explain why the board of directors was confident enough to raise the regular dividend by 11.1% earlier this month. This is the 36th straight year that the stock raised its dividend, which comfortably makes it a Dividend Aristocrat.
4. Market volatility is the long-term investor's best friend
One thing investors should know before buying T. Rowe Price is that the stock is significantly more volatile than the broader market. For instance, the stock price is down 28% year to date while the S&P 500 has fallen just 11%. This is likely because declining equity markets hit T. Rowe Price harder than any other stock since it depends on rising equity markets for its success.
The good news for long-term investors is that the stock's weakness now looks like a buying opportunity, with a forward price-to-earnings ratio of 11.1, which is well below the asset management industry average of 13.5. And while income investors wait for the stock to recover, they can collect a market-beating 3.4% dividend yield.