This has been a difficult year for asset managers in general, with the stock market in bear market territory for most of the year. As we enter the final two weeks of 2022, a year that investors will be happy to put behind them, the Nasdaq is down about 33%, the S&P 500 is off 20%, and the Dow Jones Industrial Average is down 10% year to date.
One of the most successful asset managers during the past decade, T. Rowe Price Group (TROW -0.79%) has not been immune to the market's malaise -- the stock is down about 45%. But there are a few reasons that T. Rowe Price should be on investors' radars, and the biggest one is its dividend, which it has increased each year for the past 36 years, making it a Dividend Aristocrat. Here is why T. Rowe Price can keep raising its dividend.
Dividend royalty
Generally speaking, asset managers go as the market goes, since they generate fee revenue based on the size of their asset base and inflows into their funds. When markets are down 20% and 30%, depending on the index, asset totals are going to be down similarly -- and fewer new assets are going to flow into those funds.
One just needs to look at T. Rowe Price's assets under management (AUM) to see the impact that has had on the company. Its AUM was $1.34 trillion at the end of November, down 21% from the start of the year. And as of the end of the third quarter, the company had $24.6 billion in fund outflows.
But T. Rowe Price remains a buy, particularly for those who consider themselves income investors, because of its stellar dividend. The fact that it is a Dividend Aristocrat speaks to its consistency over the years, and the key driver of that has been its pristine balance sheet. T. Rowe Price carries virtually no long-term debt compared to two of its competitors, BlackRock and Franklin Resources.
BLK Total Long Term Debt (Annual) data by YCharts
This is an intentional part of its strategy, as the company states in its marketing materials: "This stability helps us to operate with a long-term view and to continually reinvest in our business and investment capabilities so that we can better serve our clients." And with some $2.8 billion in cash on its balance sheet, it is able to continually boost its dividend and repurchase shares, even during the worst bear market in more than a decade.
This quarter, T. Rowe Price paid out a dividend of $1.20 per share for an annual payout of $4.80 per share -- at a yield of 4.4%. This is up from a dividend of $1.08 per share in 2021, although there was also a special dividend of $3 per share last year.
While earnings and revenue have consistently been down for the company this year, it still has managed to boost its dividend at a manageable payout ratio of 49%.
Keeping it going
The fact that T. Rowe Price can sustain its dividend during the worst of times reiterates the notion that this is one of the best dividend stocks out there.
The asset management company has endured a brutal year with its dividend intact and its financials in great shape, based on the foundation of its pristine balance sheet. That hasn't changed, as the company continues to operate with little or no debt and a strategy of investing in its business. For example, in the past few years, it has rolled out a suite of actively managed exchange-traded funds (ETFs), which are still building up their track records.
T. Rowe Price made its reputation on outperforming the markets, even during the long bull market of the past decade. The performance has lagged a bit in the past year, particularly on the equity side, as President and Chief Executive Officer Rob Sharps said in the third-quarter earnings report:
Many of our equity and fixed income strategies have performed well during recent market volatility. However, certain of our equity strategies have posted weaker returns which do not meet the high standards we strive to deliver for our clients. We continue to believe that our robust research resources and fundamental investment processes will allow us to deliver strong, long-term performance across our broad range of strategies, despite these recent performance challenges.
While the overall market malaise probably will continue in the first half of 2023, experts anticipate stocks rebounding in the second half of 2023 and 2024, which is good news for T. Rowe Price. And until then, because of its capital strength, T. Rowe Price should have no trouble maintaining its excellent dividend.
