T. Rowe Price (TROW 4.82%) is among the most respected name brands in the asset management business. And yet the stock is trading down nearly 50% from its 2021 highs. That's not actually all too shocking, given the company's business model, but it does offer up an interesting buying opportunity for long-term dividend investors. Here's what you need to know.
Its all about the assets under management
The core of T. Rowe Price's business is asset management, with the company owning one of the largest and best-known mutual fund families in the industry. It also provides some exchange-traded funds (ETFs) and manages alternative assets, both of which are seeing demand today. However, the key fact is that T. Rowe Price gets paid fees for running other people's money, which makes its assets under management (AUM) one of the most important figures you can monitor.
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In 2022, the company's AUM fell nearly 25%. That's an ugly number that correlates to a decline of 16% in the company's advisory fees. That's a huge hit, with earnings per share off by a touch over 37% during the year. No wonder investors have been worried, highlighting the very real concern that 2023 could see a recession that might make this situation even worse.
This is actually normal. The stock market goes up and down, and that has a massive impact on the company's AUM, which fluctuates with the market. During weak markets, the company also has to contend with investors pulling cash out of the market. This is what is happening today. But when the S&P 500 index is going up, this situation reverses with AUM increasing and investors putting more money into the market. Bear markets follow bull markets, and bull markets follow bears, so if you buy during the rough patches, like today, history suggests you'll be well rewarded when the good times eventually return.
Some reasons to buy T. Rowe Price
While it will likely require a bit of emotional fortitude to put money to work in a company that is struggling, there are some very positive things about T. Rowe Price today. For starters, the roughly 4.5% dividend yield is near the high end of the stock's historical yield range. That suggests that it is quite cheap right now. In fact, the yield hasn't been this high since the Great Recession.
And yet the dividend has increased annually for 37 consecutive years. That includes a token increase made in early 2023. So even during the hard times, T. Rowe Price is still making sure it rewards investors with dividend growth. Notably, the company paid dividends of $4.80 per share in 2022 against earnings of $6.70 per share, leading to a somewhat high -- but still acceptable given the circumstances -- payout ratio of roughly 70%.
There's one more interesting factor here, and that's T. Rowe Price's balance sheet. The company has no long-term debt. That's a rock-solid foundation from which to work and provides a huge amount of financial leeway should the market remain difficult for longer. Indeed, in a worst-case scenario, management could take on debt to support its dividend until the market turns higher again.
Buy when others are fearful
It wouldn't be true to suggest that there's no risk in owning T. Rowe Price shares. However, the company's financial strength and long history of dividend increases should be a great comfort to dividend investors. Add in a historically high yield, and it looks like right now is a great time to buy this asset manager, taking comfort in its long history of putting shareholders at the top of the priority list.
