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How T Rowe Price Group’s High-Flying Profit Makes Its Dividend a Slam Dunk

By Jay Jenkins - Sep 4, 2015 at 9:08AM

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First comes profit, then comes the dividend raises (for 29 consecutive years).

T Rowe Price Group (TROW 1.37%) currently has a dividend that yields 2.9%. That's nothing spectacular in and of itself -- until you find out that the company has increased its dividend every single year for the last 29 years. Now that is spectacular.

The key to that long-lived and remarkably consistent payout is the company's equally long-lived and consistent profits.

Over the years, T Rowe Price has been able to produce strong earnings, both in raw dollar terms, and in relation to the company's equity base. Return on equity has been consistently more than 20% on an annual basis for years. That's impressive in its own right, but even more so because T Rowe has no debt on its balance sheet. Those returns have been driven by pure profits without the extra juice from balance-sheet leverage.

TROW Net Income (Quarterly) Chart

TROW Net Income (Quarterly) data by YCharts.

The company's revenue comes primarily from fees it earns for managing investor assets in the company's various mutual funds. Net revenues were $1.1 billion in the second quarter, 88% of which came from fees from its investment portfolios.

On the expense side, the company's largest outflow goes to pay its employees. There are the customer-facing advisors and sales staff, the investment managers running the funds, and other back-office staff that keep the wheels turning. The company also spends a smaller amount of money for marketing, facilities, and other general operating expenses.

After paying all those expenses, T Rowe still has a very healthy margin left over for profits.

TROW Profit Margin (TTM) Chart

TROW Profit Margin (TTM) data by YCharts.

Profits give the company options, and those options are great for investors. T Rowe has no debt, which is also awesome, and it's thanks to its high profit margins that the company doesn't need to take on that extra balance-sheet risk. There's just no need for it -- return on equity is strong as is.

The company can use some of its profits to invest in new products and support growth. It can pay for share buyback programs, or pay dividends, which in this case is the asset allocation of choice.

TROW EPS Diluted (Quarterly) Chart

TROW EPS Diluted (Quarterly) data by YCharts.

The dividend and profits go hand in hand
A strong, consistent dividend is a result of strong profits, not the other way around. In short, T Rowe has figured out how to profit consistently over a long period of time, and that's the simple reason why its dividend is so consistent and so amazingly long-lived.

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Stocks Mentioned

T. Rowe Price Group, Inc. Stock Quote
T. Rowe Price Group, Inc.
$121.78 (1.37%) $1.65

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