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If you bet on a beauty contest, bet on the contestant you think the judges find most attractive. Don’t let your opinion be the overriding determinant.
This thought crossed my mind when vetting T. Rowe Price (NYSE: TROW), the large Baltimore-based mutual-fund company. I find T. Rowe Price’s fund offerings unattractive. I’m no fan of mutual funds. If I were to invest in a fund-type investment, I find the alternatives more attractive (such as the one here).
But like with the beauty contest, it’s not about what I find attractive. It’s what I think other investors find attractive.
Whether I find them attractive or not, mutual funds are attractive to many investors. Over 9,500 mutual funds are on offer. They hold over $16 trillion of investor assets.
Fund investors are attracted to T. Rowe Price. The attraction is understandable.
Financial companies serve as stewards of their customers’ money. Stewardship is earned through trust. Lose the trust, lose the customer.
Few financial companies are more deserving of their customers’ trust than T. Rowe Price. The company has existed since 1937. It has existed as a publicly traded company since 1986.
Trust From Income Investors
T. Rowe Price has earned its customers’ trust. It has also earned income investors’ trust.
T. Rowe Price has paid a dividend every year since 1986 public offering. The dividend has been increased every one of those years. These years include the great financial crisis of 2008 that had all the major commercial and investment banks reeling on the ropes.
Trust reflects in assets under management (AUM). T. Rowe Prices’ AUM exceeds $861 billion. Post-financial-crisis growth rates have been exceptionally strong: AUM grew 23% in 2010, 2% in 2011, 18% in 2012, 20% in 2013, 8% in 2014, and 14% in 2015.
Revenue and earnings are derived from investment advisory fees for managing assets. As AUM goes, so go revenue and earnings
The T. Rowe Price Dividend
T. Rowe Price investors care (rightly) about growth that affects their welfare. Earnings and dividend growth matter most.
On that front, the T. Rowe Price EPS has grown at a respectable 7.9% average annual rate since 2007. The T. Rowe Price dividend has grown at an even more respectable rate, 12.5% annually.
What’s more, the regular T. Rowe Price dividend has twice been supplemented by a special dividend. A $1-per-share special dividend was paid in 2012; a $2-per-share special dividend was paid in 2015. The dividend consumes a conservative 45% of T. Rowe Price’s current earnings.
That T. Rowe Price readily converts earnings growth to dividends growth is understandable. A 30% net margin means much of what is reported on the top line drops to the bottom line.
It also means the cash account is continually replenished. T. Rowe Price carries $1.6 billion in cash and cash equivalents on its balance sheet. This divides to approximately $6.40 of cash per share.
Because cash isn’t paid as interest and principal to bondholders, because there are none, it can be used to increase dividends annually and to buy back shares. Shares outstanding have been reduced 7.8% over the past three years.
T. Rowe Price offers a 3% dividend yield — an enticing entry yield for a dividend aristocrat. A couple years ago, the yield would have been considerably lower.
Since early 2015, T. Rowe Price shares have been losing altitude. A T. Rowe Price share would have cost you $85 two years ago. That same share will cost you $75 today.
I’m no mutual-fund investors, so I have little attraction to T. Rowe Price’s funds. I am income investor, though. I find T. Rowe Price’s dividend growth very attractive.
Thirty years of 14% average annual dividend growth elevates a $0.04 per-share annual dividend to a $2.18 per-share annual dividend.