In recent years, T. Rowe Price (TROW 4.77%) has faced increasing competition from passively managed investment companies. Despite a significant shift in investors' preference from active management to passive management for over a decade, T. Rowe continues to deliver for its investors.
The asset manager has raised its dividend over multiple recessions and pays investors a healthy 4.3% dividend yield. If you invested $1,000 in T. Rowe Price 20 years ago, your investment today would be worth $10,580. To put this in perspective, a $1,000 investment in the SPDR S&P 500 ETF (SPY 0.95%) would be worth $6,681 today.
T. Rowe has delivered over a long time for investors, but the stock has faced quite a bit of volatility in recent years. Here's what you should consider before buying this dividend stock.
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T. Rowe Price has weathered changed investor preferences
T. Rowe Price provides investment management services worldwide through its mutual funds, subadvised funds, separately managed accounts, investment trusts, and other products. It is known as an active manager, with portfolio managers and analysts getting paid to try to outperform some specific benchmark index.
This contrasts with passive management, which intends to match a specific index and operates mainly on autopilot. Passive management has won over more investors in recent years because the management expenses levied on investors are so much lower. Since 2012, passive investments went from 21% of total assets managed by investment companies to 45% in 2022.
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Despite the shrinking market share for active managers, T. Rowe has increased its assets under management (AUM) by 10% annually since 2011.
Why the stock soared in 2020 and came crashing down
In recent years, T. Rowe's stock returns have been a roller-coaster ride for investors. That $1,000 investment would have peaked at $19,260 in late 2021 before crashing, with the stock falling nearly 50% from its peak.
Data source: YCharts.
T. Rowe benefited from stellar performance in its investment portfolio during 2020 and 2021. The stock market and T. Rowe's AUM were reaching all-time highs. From 2019 to 2021, T. Rowe's AUM grew 40%, primarily driven by its strong investment performance. This boosted its fee income based on its total amount of AUM.
However, in 2022 the stock market performance and T. Rowe's portfolio performance were lackluster, and its AUM fell 25%, while its net income plummeted 50% from the year before.
T. Rowe's investments have done a solid job of outperforming their benchmarks. Over 10 years, 64% of its mutual funds across various asset classes outperformed their passively managed peers. Last year it struggled, with only 39% of its mutual funds outperforming their benchmark indexes, contributing to its lackluster earnings.
Active management isn't going anywhere
Active investing has fallen out of favor with investors in recent years. However, I don't think it's game over for active managers. That's because active and passive investments can outperform in different market environments.
According to a study by Hartford Funds Management Group, active managers have outperformed passive managers in 18 of the past 35 years. The investment advisor noted that active and passive managers go through cyclical phases. It noted that active management fares better during corrections. Active managers have outperformed their passive counterparts over 27 market corrections in the past 33 years.
Today's markets are grappling with interest rates at their highest level in a decade and a half, stubbornly high inflation, and geopolitical uncertainty, which could contribute to more volatility in the coming years. This could benefit active managers like T. Rowe Price, which could use its expertise to navigate this environment.
A solid dividend stock with reliable growth
T. Rowe Price is a solid dividend stock if you're looking for passive income. It has an attractive 4.3% dividend yield and has raised its dividend payout for 38 consecutive years. It has faced increased competition from passive managers but has continued to increase its AUM despite this.
The stock has seen a lot of volatility since the start of last year but currently trades below its 10-year average price-to-tangible book value. Given its history of growing dividends and AUM, along with its discounted stock price, T. Rowe Price looks solid to buy today and hold for the long haul.
