If every month that passes by is one step closer to financial independence, I’m probably taking two steps forward this month.
What’s really interesting is that I’m seeing some opportunities across various industries. So I’m spreading that capital out across not only different industries, but also differing companies with unique business models. And these stocks all give the portfolio something different in terms of yield, growth, quality, and risk.
This most recent pick up involved the purchase of a stock that I think blends all of those aspects incredibly well, so I’m getting an attractive yield, great growth, high quality, and somewhat low risk.
I purchased 5 shares of T. Rowe Price Group Inc. (TROW) on 6/4/15 for $79.30 per share.
T. Rowe Price Group Inc. is a global investment manager that provides asset management services for institutional and individual investors.
As of December 31, 2014, the company had a record $746.8 billion in assets under management.
Approximately 64% of the company’s managed assets are held in sponsored US mutual funds. And the vast majority of the AUM are held in retirement accounts and variable-annuity portfolios.
Great First Quarter
TROW seems to fit that description.
The stock is down more than 4% since then, yet what has the business actually done over the last few months?
They reported revenue, investment advisory fees, and assets under management were all up 8% from Q1 2014. EPS was up 1% YOY.
So you’ve got a business that’s growing – growing at a robust rate in some areas, no less – yet a stock that’s falling. That spells o-p-p-o-r-t-u-n-i-t-y.
I decided to not let that opportunity pass me by. I never intended for TROW to be a major position for me (and still don’t), but I also don’t mind averaging down a little on a great business like this. I analyzed the stock back in March (you can read the analysis using the link above) and concluded that it was high quality across the board. Growth well into the double digits and fundamentals that rank it at or near the top of the industry. Just a lot to like here.
One major difference between buying TROW in early March and buying TROW in early June, however, is that the stock no longer comes attached with a $2 special dividend – that was paid in April.
I’ll also note that James A.C. Kennedy, CEO and president and chair of the company’s Management Committee, will retire from the firm in 2016, after 38 years with TROW. William J. Stromberg, who’s been with the company for 28 years, will take over those roles in 2016.
Otherwise, this is really just an incredible opportunity to average down on a high-quality dividend growth stock with almost three decades of strong dividend growth under its belt.
I see the primary risk for the company as the rising prominence of index funds. Some recent large outflows have been apparently due to some clients interested in saving fees, and thus moving assets to index funds. T. Rowe Price’s issue here is that if it decides to offer low-fee index funds to appease clients and retain AUM, it would sacrifice significant fees. And I’d be willing to venture a guess that management feels it deserves the fees its charging due to consistent outperformance.
Another risk is the fact that the domestic stock market has risen so much so fast over the last five years that any correction could cause a reduction in AUM that may be compounded by the possibility of outflows as an emotional response by clients. While cash inflows have significantly contributed to the positive change in AUM over the last decade, market appreciation has accounted for much more. And TROW remains heavily exposed to equities.
Lastly, a more mild risk is the fact that TROW calculates its investment advisory fees on a daily AUM calculation, so any increased volatility could affect their revenue and net income.
TROW’s P/E ratio is 17.78 here on my price, which compares extremely favorably to the stock’s five-year average P/E ratio of 21.7. In addition, TROW is trading for a P/E ratio well below that of the broader market. Moreover, TROW’s five-year average yield is only 2%. It’s now 2.62%. That’s a spread of more than sixty basis points.
I valued shares using a dividend discount model analysis with a 10% discount rate and an 8% long-term growth rate. That growth rate is on the higher end of what I usually use, but it seems to be warranted here. TROW’s long-term dividend growth rate is substantially higher and the most recent raise just announced earlier this year was almost twice that. In addition, the payout ratio is moderate. There’s a chance that upcoming dividend raises could be lower if the market corrects significantly, but I believe that would be somewhat short term in nature like it was during the financial crisis. The DDM analysis gives me a fair value of $112.32.
I discussed this business’s incredible fundamentals and competitive advantages back in March, so I won’t rehash that.
However, I will note that I’m always more than happy to average down on a fantastic stock when the market decides to discount merchandise for no apparent reason. The business just posted another excellent quarter – another in a long line of them – and yet the stock is down almost 10% YTD. Absolutely fine by me.
This was a rather small transaction for me, but I used a free trade in my Scottrade account. So there was no commission fee here.
This purchase adds $10.40 to my annual dividend income, based on the current $0.52 quarterly dividend.
I’m going to include current valuation opinions from other analysts below, which I use to concentrate my reasonable valuation estimate:
Morningstar rates TROW as a 4/5 star value, with a fair value estimate of $89.00.
S&P Capital IQ rates TROW as a 4/5 star “buy”, with a fair value calculation of $94.50.
I’ll update my Freedom Fund in early July to reflect this recent purchase.
Full Disclosure: Long TROW.
What are your thoughts on TROW? Is this high-quality merchandise that’s irrationally marked down?
Thanks for reading.
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