Investors looking for a good value stock to invest in should closely examine T. Rowe Price Group (TROW 0.44%) today. This S&P 500 index component is definitely dealing with short-term headwinds, but they are no different from what it has ably handled in the past.
If you act now, while this blue-chip asset manager looks cheap, you can lock in a historically generous 4.3% dividend yield on the stock you buy. Here's a quick primer on the stock and why it's a bargain right now.
Money is going out the door
The big problem for T. Rowe Price is that the asset pile it manages (more about this below) is getting smaller. In 2022, its assets under management (AUM) fell from roughly $1.688 trillion at the start of the year to $1.275 trillion by the end of it. That's a hefty 24.5% decline. There are two factors contributing to this drop.
Image source: Getty Images.
The first is the most important, and that's the stock market decline that occurred last year. The value of the market fell by roughly 20% in 2022. As the market drops, the investments T. Rowe Price has made generally decline as well. That leads to a fall in AUM. The second headwind for AUM is that skittish investors tend to pull money out of the market as it goes down. Such redemptions also reduce the amount of money that T. Rowe Price has to manage.
None of this is good news, but the most important thing to remember is that this is actually normal. The impact the S&P 500 index's normal variability is having on T. Rowe Price's business is just what happens. And it has an impact on the company's earnings because it gets paid fees based on the size of its AUM. When the market turns higher again (as it invariably will), T. Rowe Price's business will pick up.
Historically cheap and still financially strong
Investors reacted to the market headwinds this finance icon is facing by selling the stock. That, in turn, pushed the yield up to the aforementioned 4.3%. The last time the yield was up at this level was during the Great Recession. Using the dividend yield as a rough gauge of value, T. Rowe Price hasn't looked this cheap in over a decade.
NASDAQ: TROW
Key Data Points
But there are a couple of things to keep in mind here. For starters, the company has increased its dividend annually for 37 consecutive years. The most recent increase was announced in February, so its board was well aware of the headwinds the company is facing when it made that call. Companies generally avoid increasing dividends if they think they will just have to cut them in short order, so this was likely a big statement about the confidence management has in the future of its business.
But think about the last 37 years. There have been multiple bear markets and recessions. T. Rowe Price has lived through each of them. Yes, AUM fell during the downturns and so did earnings, but they bounced back again when the market recovered. That is highly likely to happen again this time around.
Adding to the allure, meanwhile, is that T. Rowe Price's balance sheet has no long-term debt on it. Companies with no debt have a huge amount of financial leeway to deal with adversity. So T. Rowe Price is dealing with today's hard times from a position of strength, not weakness.
A cheap and reliable income stock
There's no way to predict what is going to happen in the stock market, so T. Rowe Price's business could remain under pressure for longer. However, if history is any guide, investors have placed a very cheap valuation on a company that has proved it can deal with this type of adversity.
And just as important, it continues to reward investors with a generous dividend right through it all. Now is the time to look at T. Rowe Price, because it will be too late when the market eventually recovers.
