Since its peak last December, the S&P 500 index is 14% off of its 52-week high. Recession and inflation-related concerns have played a large role in this decline.
Yey some stocks have fared much worse than the S&P 500. The asset manager and Dividend Aristocrat T. Rowe Price Group (TROW 0.40%) is among this group, with a whopping 44% plunge from its 52-week high last November.
Has the downturn in the broader market created a buying opportunity in T. Rowe Price? Let's take a look at the asset manager's fundamentals and valuation to find out.
The second quarter was just a bump in the road
The Baltimore-based asset manager disclosed its second-quarter earnings in late July. Unsurprisingly, T. Rowe Price missed the average analyst prediction for both net revenue and non-GAAP (adjusted) diluted earnings per share (EPS).
The company generated $1.5 billion in net revenue during the quarter, which was down 21.6% year over year. For context, this was well below the $1.7 billion that analysts were expecting for the quarter. What was behind T. Rowe Price's second net revenue miss out -- the second such shortfall in the past 10 quarters?
Due to the dip in equity markets, the company's average assets under management (AUM) fell 11.2% over the year-ago period to $1.41 trillion in the second quarter. Along with a 5.5% year-over-year decline in T. Rowe Price's investment advisory fee rate to 42.7 basis points, this explains its steep drop in net revenue.
Some growth-oriented investors exited the company's funds. This resulted in net client outflows of $14.7 billion during the quarter, but it's more a sign of market fear than T. Rowe Price's funds losing their competitive advantage. This is because the vast majority of its AUM have outperformed the category median over the last three, five, and 10 years.
The company reported $1.79 in adjusted diluted EPS during the second quarter, which was a 45.9% plunge over the year-ago period. This was a much sharper fall in adjusted diluted EPS than the average analyst estimate of $2.64.
Higher operating expenses and a lower net revenue base led the company's non-GAAP net margin to plummet 1,280 basis points year over year to 27.6% in the second quarter. This was only slightly offset by a 0.6% decline in T. Rowe Price's weighted average share count to 227.9 million during the quarter.
Fortunately, the odds are that the stock market will eventually bounce back. Paired with T. Rowe Price's outperforming funds, this will lead to rising AUM and profitability over time. That's why analysts expect the company's adjusted diluted EPS will compound 12.6% annually over the next five years.
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A yield that isn't too good to be true
T. Rowe Price's 3.9% dividend yield is more than double the S&P 500 index's 1.5% yield. Yet the dividend is quite safe.
This is supported by the fact that it's projected that T. Rowe Price's dividend payout ratio will be 57.8% in 2022. This payout ratio may seem high for an asset manager. But it's important to remember that T. Rowe Price's adjusted diluted EPS is predicted to bottom this year, so that artificially inflates the payout ratio.
The current valuation is favorable to long-term investors
T. Rowe Price's future should be bright beyond the near term. Combined with its sensible valuation, the stock is positioned as a potentially good buy for patient investors.
T. Rowe Price's forward price-to-earnings (P/E) ratio of 14.4 is only slightly above the asset management industry average forward P/E ratio of 13.5. That's hardly an unreasonable premium to pay for the stock's track record of 36 consecutive years of dividend growth.
