"Similar but different" is the best way to describe Franklin Resources (BEN -0.40%) and T. Rowe Price (TROW 4.77%). That said, the difference that's most important is probably one that a lot of investors wouldn't even look at. But, in this pair-up of high-yield asset managers, it really is the difference between feeling comfortable enough to sleep at night and living with the fear that a dividend cut is a realistic possibility.
The basic model
Both Franklin Resources and T. Rowe Price manage money on behalf of others. They have various products, from mutual funds to alternative investments, but the big picture is that they charge fees based on the amount of money they have under management. Assets under management, or AUM, is what has the biggest effect on the top and bottom lines.
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AUM changes as customers add and subtract from their accounts. But the market's gyrations have a much greater effect on the sum. So, when markets are weak, these two companies tend to see revenues and earnings decline along with AUM. And when the market is strong, AUM goes up and revenues and earnings head higher.
As it stands, 2022 was a tough year, and things haven't greatly improved so far in 2023. Franklin Resources' average AUM was lower by 6% year over year in the first quarter. Earnings were lower by 36%. T. Rowe Price's average AUM was lower by 15.2% year over year in the quarter, and earnings were off by 35.5%.
That's not a great backdrop, but every bear market in Wall Street history has been followed by a bull market (and vice versa, of course). So the real question here is: Can these companies keep paying generous dividends while they await a recovery in AUM?
"Safety first" wins the day
Franklin Resources' adjusted earnings totaled $0.61 per share in the first quarter. It paid dividends of $0.30 per share. That is an adjusted earnings payout ratio of roughly 50%. However, generally accepted account principles (GAAP) earnings were $0.38 per share, which gives a much less favorable view of the payout ratio. Using GAAP figures, the payout ratio is a troubling 80% or so. That's not to suggest that Franklin Resources can't sustain the payout, but investors wouldn't be mistaken to feel there's some risk here.
Add to that the company's debt, which sits at around $3.3 billion. That's not exactly unreasonable, but leverage reduces financial flexibility. T. Rowe Price has no debt, so it has much more leeway to endure periods of weakness. Some might argue that Franklin Resources' nearly $3.5 billion in cash more than outweighs the debt, which is true. But it would have to use up almost all of that cash to pay down debt in a dire emergency. All of T. Rowe Price's $2.1 billion in cash is ready to be used to support the dividend, invest in the business, or acquire companies to grow AUM inorganically.
As for T. Rowe Price's payout ratio, it earned $1.83 per share on a GAAP basis in the first quarter, with dividends of $1.22. That's a payout ratio of roughly 66%. On an adjusted basis, the numbers were worse, with the payout ratio dropping to 72% on adjusted earnings of $1.69 per share.
So the dividend is eating up a lot of earnings, but it doesn't seem like there's any reason to worry more about T. Rowe Price than Franklin Resources. Add in the balance sheet strength, and T. Rowe Price looks like a much more attractive risk/reward option.
Pick the lower yield
Both Franklin Resources and T. Rowe Price have long histories of increasing their dividends annually. The current headwinds probably aren't going to cause either one to cut their dividend. And yet, if you are looking to be conservative, T. Rowe Price's debt-free balance sheet provides a huge amount of extra safety for the dividend and the stock's 4.6% dividend yield. Things would have to get extraordinarily bad for the company, with no debt, to resort to a dividend cut. Even though its debt load is hardly unreasonable, Franklin Resources just doesn't match up from a risk/reward standpoint, with an only slightly higher 4.7% yield.
