Company Description: T. Rowe Price Group Inc. operates one of the largest no-load mutual fund complexes in the United States.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
TROW is trading at a discount to only 3.) above. The stock is trading at a 27.2% premium to its calculated fair value of $48.43. TROW did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
TROW earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. TROW earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1986 and has increased its dividend payments for 25 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
The NPV MMA Diff. of the $799 is below the $1,000 target I look for in a stock that has increased dividends as long as TROW has. If TROW grows its dividend at 9.5% per year, it will take 4 years to equal a MMA yielding an estimated 20-year average rate of 3.1%. TROW earned a check for the Key Metric 'Years to >MMA' since its 4 years is less than the 5 year target.
Memberships and Peers: TROW is a member of the S&P 500, a Dividend Aristocrat a member of the Broad Dividend Achievers™ Index. The company's peer group includes: The Federated Investors (FII) with a 4.7% yield, Eaton Vance (EV) with a 2.6% yield and BlackRock Inc. (BLK) with a 3.0% yield.
Conclusion: TROW did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks TROW as a 3-Star Hold stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $56.66 before TROW's NPV MMA Differential increased to the $1,000 minimum that I look for in a stock with 24 years of consecutive dividend increases. At that price the stock would yield 2.4%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,000 NPV MMA Differential, the calculated rate is 10.3%. This dividend growth rate is above the 9.5% used in this analysis, thus providing no margin of safety. TROW has a risk rating of 1.75 which classifies it as a Medium risk stock.
With a well-respected brand and a strong market share, TROW is well-positioned as an asset manager. It consistently produces net client inflows based on the relative performance of its funds. On a three-year performance basis, 76% of its funds are in the top half of their categories.
The company has been able to generate more stable results than its peers with significant invested assets in retirement accounts and variable-annuities. This focus provides a much more stable investment base with lower turnover. The stock's current valuation is 27% above my calculated fair value of $48.43. I am watching this stock closely, but unwilling to buy at this premium and yield.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in TROW (0.0% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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