T. Rowe Price (TROW 0.40%) is offering investors a historically generous 4.4% yield today. For long-term dividend investors, that should spark at least a little interest, as it suggests that Wall Street has placed the shares on the discount rack. There are definitely reasons to worry about near-term financial results, but the long term may not be as bleak as investors fear.
The problem with AUM
T. Rowe Price gets paid to manage money on behalf of its customers. The fees it receives for this service go up and down based on the amount of money it is managing, or its assets under management (AUM). There are two ways that AUM changes over time. One is customer-driven, as clients give T. Rowe Price money to manage or, conversely, withdraw money. Money tends to be fairly sticky in the asset management business, so this is normally not the main driver.
Image source: Getty Images.
The larger impact on AUM generally comes from the ups and downs experienced by Wall Street. Bear markets can dramatically reduce AUM, while bull markets can quickly increase AUM. Unfortunately for T. Rowe Price, the market has been largely heading lower since the S&P 500 index hit a peak around the start of 2022. So the company's AUM has dropped at a rapid clip. In 2022 the decline from the start of the year to the end was 24.5%.
Adding to the complexity here is that T. Rowe Price's business is traditionally driven by products that feature active portfolio management, which generally allows for higher management fees. There's been a trend toward lower-cost indexing that leads to AUM outflows, as well. All in, the past year or so has not been kind to T. Rowe Price, with 2022 adjusted earnings per share falling 37% from 2021. No wonder the stock has been on a downtrend, which pushed the dividend yield toward historic highs.
T. Rowe Price is moving in the right direction
The first thing to highlight is that, as noted, customers in the asset management industry don't tend to move money around all that often. There are a number of reasons for this, but a big one is inertia, given that changing money between asset managers can be, at the best of times, a hassle. Basically, assets are fairly sticky throughout the industry.
Thus, there's some resilience to adjusted earnings, which were down dramatically in 2022 but still totaled $8.02 per share. That figure is comfortably above the $4.80 per share in dividends that T. Rowe Price paid in 2022. The adjusted earnings payout ratio was a solid 60%. The dividend yield may be high, but it seems like the dividend is pretty well covered.
The second factor that is important here is that T. Rowe Price carries no long-term debt on its balance sheet. That's not a guarantee that the dividend won't be cut. However, it provides a massive amount of support to the payment since there's no need to worry about lenders having to be paid ahead of the dividends that are going to investors. In a worst-case scenario, meanwhile, management could take on debt to cover the dividend during a period of temporary business duress.
Third, T. Rowe Price is aware of the long-term trends toward indexation and is doing something about it. Not only has it entered the indexing space via a collection of exchange-traded funds (ETFs), but it has also broadened its portfolio into alternative asset management. This area is attractive to higher-net-worth investors and is still driven largely by active management. T. Rowe Price is controlling the things it can as it adjusts to the realities it faces.
And fourth, when the market turns higher again, which history suggests it will do eventually, AUM will likely expand at a rapid clip. The month of January 2023, for example, ended with AUM at about $1.35 trillion, up from $1.275 trillion at the end of 2022. That increase came despite $5.7 billion in customer withdrawals. Simply put, when the market turns higher, T. Rowe Price's business will quickly start to look attractive again.
Things go up and down
January was a good month for the stock market, but you shouldn't read too deeply into the month's AUM figures. Wall Street is volatile, and there's no clear indication that a sustainable new bull market has begun. However, T. Rowe Price has a solid core and is working to adjust to longer-term industry trends. It can't control the market, but when investors get bullish, the company's AUM will quickly recover and push its fee-based earnings higher. While waiting for that to happen, investors can collect a historically generous and well-supported dividend yield from this well-respected asset manager.
