T. Rowe Price's (TROW 0.73%) stock fell sharply over the past year, dropping more than 25%. Since dividend yield and price move in opposite directions, this is the reason the asset manager's dividend yield is so high today, sitting at around 4%. But that's too simple an explanation, and it doesn't really help explain why this pullback could actually be offering long-term investors an enticing investment opportunity.
It's just business
T. Rowe Price is an asset manager, which means it manages money on behalf of its customers. Generally speaking, it charges fees for this service. So the total value of the investments it manages, known as assets under management (AUM), is a huge determinant of how much it earns. As AUM goes up, T. Rowe Price earns more; as AUM goes down, it earns less. It's a fairly simple relationship.
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The problem for the stock is that most of what T. Rowe Price invests in is traded in the public markets. Bull markets are historically followed by bear markets and vice versa. It's just how the investment world works. But think about the effect that would have on T. Rowe Price's AUM. Right now, the market is in a drawdown, leading the company's AUM to fall nearly 24% year over year in the third quarter of 2022. Earnings dropped 43%.
Those kinds of numbers make it very clear why investors are so downbeat on the stock, pushing the yield up to a high level. In fact, the yield hasn't been this high since the Great Recession!
In fairness, there are other long-term trends in play, notably the shift toward lower-cost index products like exchange-traded funds (ETFs). But T. Rowe Price is working to adjust its offerings to keep up with the changing market. However, the real story right now is that the company's AUM is getting mauled by a bear.
When things get good again for T. Rowe Price
Eventually, the bear market will end and T. Rowe Price's AUM will rebound. When that happens, the fees it earns will increase, and so, too, will its earnings per share. Short-term investors will then pile back into the stock and push the shares higher again. It's the reverse of what's happening now.
NASDAQ: TROW
Key Data Points
So, from a long-term perspective, today's 4% dividend yield looks like a very compelling investment opportunity for long-term dividend investors. That said, there's simply no way to know how long any given bear market will last. So here's a small bit of information to help you get over the hump if you are still worried about the future: The company has zero long-term debt.
TROW Dividend Yield data by YCharts
You read that correctly -- T. Rowe Price has a virtually pristine balance sheet. In fact, it has over $2.3 billion in cash, which is as squeaky clean as you can get. Perhaps this is stating the obvious, but companies without debt generally don't go out of business very often. If you are worried about whether or not T. Rowe Price can survive a deep bear market, well, it would be pretty shocking if it didn't.
Don't wait too long
Of course, even a strong convocation about T. Rowe Price's ability to muddle through hard times isn't going to tell you when those hard times will end. So buying at this point still requires some fortitude, since the near-term pain could linger. But given the historically high yield, investors looking at the finance space would be remiss not to give this stock a very close look. If you spend too much time attempting to time the bottom, however, you may end up missing the opportunity entirely.
