Growing passive income can be a rudder to help investors navigate the rough waters of market volatility. A company with a track record of raising its dividend through thick and thin can shift attention away from poor stock performance in the short term.
As S&P 500 stocks with 25 or more consecutive years of annual dividend hikes under their belt, Dividend Aristocrats are as steady as they come in the world of income investing. The asset manager, T. Rowe Price (TROW +0.53%), is a Dividend Aristocrat with 36 consecutive years of dividend growth.
But with the stock down 37% thus far in 2022 versus the Nasdaq Composite's 29% drop during that time, is now an opportune time to buy T. Rowe Price? Let's drill down into the asset manager's fundamentals and valuation to try to get an answer.
NASDAQ: TROW
Key Data Points
The sting from the market sell-off will only be temporary
T. Rowe Price's nearly $1.3 trillion in assets under management (AUMs) as of last month positions it as one of the largest asset managers in the world. And just as the bear market in stocks has been a headwind for its industry peers, it has also been a challenge for the company.
T. Rowe Price's net revenue fell 18.7% year over year to $1.6 billion in the third quarter ended Sept. 30. But what specific factors led to the decline in net revenue?
Due to the slump in the stock market, T. Rowe Price's average AUMs during the quarter dropped 18.3% over the year-ago period to just over $1.3 trillion. A 1.1 basis-point year-over-year decrease in the investment advisory fee rate to 42.5 basis points amid industry competition explains the slide in net revenue for the quarter.
T. Rowe Price's non-GAAP (adjusted) diluted earnings per share (EPS) plummeted 43.1% over the year-ago period to $1.86. As net revenue contracted, the company's operating expenses edged 5.8% higher year over year from its acquisition of the investment firm, Oak Hill Advisors. That led to a 1,220 basis-point drop in its non-GAAP net margin over the year-ago period to 27.1%. A 1.2% reduction in T. Rowe Price's weighted-average diluted-share count to 226.3 million via share repurchases wasn't enough to offset this decline in profitability. This is why the company's plunge in adjusted diluted EPS was at a steeper rate than the dip in net revenue.
As is the case with any asset manager, T. Rowe Price's fate is inextricably linked to that of financial markets. As the stock market eventually rebounds, the company's net revenue and earnings will as well. This is because, with 79% of T. Rowe Price's mutual funds outperforming their benchmark over a 10-year period, the company is still a well-run asset manager.
Image source: Getty Images.
A battle-tested dividend
T. Rowe Price offers income investors a 4% dividend yield, which is quite appetizing compared to the S&P 500 index's average 1.7% yield. And having been raised through the tech bubble, the Great Recession, multiple wars, and the COVID-19 pandemic, this dividend is more durable than you'd think.
T. Rowe Price's dividend payout ratio is poised to come in at 60.7% in 2022. This is somewhat high for the asset manager. But because the asset management industry is light on capital expenditures, the payout ratio is still manageable. And given that profits will almost certainly bounce back in the next few years, dividend coverage should eventually improve.
T. Rowe Price is still a solid buy-and-hold stock
T. Rowe Price deserves the benefit of the doubt that it will recover from the 2022 market meltdown. And the stock looks like it could be a good value for the long run.
For instance, T. Rowe Price's trailing-12-month price-to-sales ratio of 4 is well below its 10-year median of 5.3. This arguably builds in the necessary margin of safety to make the stock a buy for income investors.
