I spend a lot of time researching, reading, and watching videos on the economic landscape and outlook. It’s partly to be better informed about the articles I write here on Seeking Alpha, but it’s also motivated by my curiosity know what is happening in the world. When it comes to the actual buying and selling of investments, I’ve spent most of the past two months watching and waiting, but one company on my short watch list is T. Rowe Price (NASDAQ: TROW).
T. Rowe Price is an asset manager who should be on the shortlist of investors looking for the best companies in the industry. The company has virtually no debt on the balance sheet, impressive margins and a long streak of dividend increases that income investors will appreciate. After a nearly 40% year-to-date sell-off, shares are now trading at an earnings multiple of 10.5x with a dividend yield of 4.1%. If stocks continue to sell with the market, I will look to add stocks below $100. This gives the stock a single-digit P/E ratio with a yield approaching 5%. I wouldn’t characterize the stocks as a strong buy just yet, but they are closing in as the selloff has continued over the past couple of months.
High margins despite lower assets under management
When I last wrote about T. Rowe Price, I talked about AUM and margins. Anyone who knows T. Rowe Price knows that the long-term growth story will be driven by growth in assets under management. Anyone looking at the short-term picture probably has questions about the AUM. At the end of 2021, the AUM was 1.7 T$. They have since fallen to $1.4 T at the end of May. Although the AUM may decline in the short term, I still believe the company has the potential to grow the AUM for years to come.
Even with a weaker operating environment, T. Rowe Price still had net margins well over 25%. Despite the fact that the AUM has declined in 2022, I think investors with a long-term horizon could do themselves a favor by buying the recent weakness. The valuation is attractive right now, and if the stock price continues to fall, the valuation will become very attractive.
T. Rowe Price generally follows market cycles, and this year was no exception. Stocks bottomed in 2009 and the COVID crash nearly 10x earnings, and while I’m not a short-term trader, I think the risk/reward ratio is skewed to the upside. Shares are now trading at 10.5x earnings, well below the average multiple of 20x. To be clear, I don’t expect T. Rowe Price to trade at or near 20x earnings as the broader markets struggle. The operating environment was poor in 2022 and there is no guarantee that it will improve in the second half of 2022.
Although multiple expansion is not guaranteed in the short term, I think we are bound to see multiple expansion if your time horizon is longer than one year. Companies with a T. Rowe Price margin profile do not stay near a single-digit P/E ratio for an extended period. If stocks head for 15x earnings and the estimates are accurate, investors are eyeing double-digit returns from here. Another reason for optimism is T. Rowe Price’s generous capital return program.
Dividends and redemptions
T. Rowe Price is part of the exclusive club of dividend aristocrats. While we may not see another special dividend like we’ve seen in 2021 for a while, I believe the annual dividend increases will continue. With their track record and history of increases, it doesn’t take much of a crystal ball to predict this. The yield currently sits at 4.1%, which is attractive given the track record of dividend growth.
They also buy back shares at a decent price. They repurchased 2.1 million shares in the first quarter, at an average price of $152 per share. This represents just under 1% of the outstanding shares. Although we have to wait about a month for the next quarterly report, I guess they continued to buy back shares in the second quarter. I wouldn’t be surprised if buybacks picked up a bit as the stock price fell and the company was able to buy back more shares at a more attractive valuation.
T. Rowe Price is a high quality company currently trading at an attractive valuation. I’ll be the first to admit that they’re not immune to broader market weakness, which is evident in their declining AUM balances in the first half of 2022. While bullish investors would certainly prefer to see a growing AUM balance, the weakness in the stock price is a buying opportunity for investors with a long-term time horizon. The shares are trading at 10.5 times earnings, which is a steal for a company with T. Rowe Price’s margin profile. Income-oriented investors also have reason to be excited, with a dividend yield of 4.1% and a long, proven track record of dividend growth. I will look to add to my position if the weakness in the share price continues, but I think the risk/reward ratio is skewed to the upside for investors with a longer time horizon.