Since closing at a record high of just below 4,800 in late 2021, the S&P 500 index has struggled: Elevated inflation throughout 2022 and into this year has led to interest rates rocketing higher in the past year and beyond. The fallout of the ongoing war between Russia and Ukraine has also been a source of uncertainty in the markets.
As you would expect, these events have also weighed on T. Rowe Price Group's (TROW -2.01%) financial results and stock performance during that time. But the stock is a buy for income investors, in my opinion. Let's analyze three reasons why.
1. T. Rowe Price is a perpetual outperformer
In the asset management industry, reputation is everything. Considering that institutional and retail investors are entrusting asset managers with huge sums of money and their life savings, this makes perfect sense.
Founded in 1937 during the Great Depression, T. Rowe Price commands the confidence of prospective clients like few other asset management companies. As is the case for all of its major peers, T. Rowe Price has seen its assets under management (AUM) fall well below their all-time high of $1.7 trillion set back in December 2021. Largely because of the market sell-off of 2022, its AUM as of March 31 was $1.3 trillion.
But there is reason to believe that it can eventually bounce back and set a new all-time high for AUM, as well as for net revenue and adjusted diluted earnings per share (EPS). The company's reputation as an asset manager remains intact: As of last June, 71% of T. Rowe Price's U.S. mutual funds (i.e., actively managed funds) outperformed the median of their passively managed counterpart funds in the past 10 years. Put another way, a large majority of the company's funds have beaten passively managed index funds over the long run.
Just as it has after every bear market, the stock market will eventually begin a new bull market. And when that does happen, T. Rowe Price could again benefit from rallies in its AUM and net inflows back into its funds. That's why analysts think that the company's adjusted diluted EPS will see a return to growth beginning in 2024.
Image source: Getty Images.
2. A market-smashing payout
In the meantime, income investors can collect a generous 4.3% dividend yield. For context, that is almost triple the S&P 500 index's 1.6% yield. Investors can also sleep well at night knowing that the company has 36 years of dividend growth and has increased its payout through numerous recessions.
The company's dividend payout ratio probably will come in at about 72% in 2023, meaning that share of net income will be paid out to shareholders. This is fairly high for an asset manager. But it is worth noting that this elevated payout ratio won't be static: It will almost certainly improve in the years ahead as dividend growth trails increases in earnings for the next few years.
3. The stock is a reasonable value
T. Rowe Price's forward price-to-earnings (P/E) ratio of about 15.5 is well above the average forward P/E of 11.7 for the asset management sector. But this premium valuation is justified by the company's excellent track record of dividend growth and fund performance.
This is why I would argue that shares of T. Rowe Price look to be a buy -- with a caveat. If a worse-than-expected recession were to unfold or the market even entertained that possibility, the stock could see meaningful downside beyond its current $111 price. Prospective shareholders should know this going in, and add shares on any big price dips with the expectation that the underlying business -- and its stock -- will once again rebound.
