TROW operates one of the largest no-load mutual fund complexes in the United States.
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 above-linked PDF for a detailed description):
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
TROW is trading at a discount to only No. 3 above. The stock is trading at a 34.3% premium to its calculated fair value of $47.75. 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 above-linked PDF for a detailed description):
- Free Cash Flow Payout
- Debt To Total Capital
- Key Metrics
- Dividend Growth Rate
- Years of Div. Growth
- Rolling four-year Div. > 15%
TROW earned three Stars in this section for Nos. 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 above-linked PDF for a detailed description):
- NPV MMA Diff.
- Years to > MMA
The NPV MMA diff. of the $902 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 three years to equal an MMA yielding an estimated 20-year average rate of 2.6%. TROW earned a check for the key metric Years to >MMA since its three years is less than the five-year target.
Memberships and Peers
TROW is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers Index. The company's peer group includes Federated Investors (NYSE:FII) with a 4.4% yield, Eaton Vance (NYSE:EV) with a 2.6% yield, and BlackRock (NYSE:BLK) with a 3.3% yield.
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 Three-Star Hold stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $61.43 before TROW's NPV MMA Differential increased to the $1,000 minimum that I look for in a stock with 25 years of consecutive dividend increases. At that price the stock would yield 2.2%.
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 9.9%. 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. For the three years through Q2 2012, 73% of the firm's funds outperformed their comparable Lipper averages.
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 34% above my calculated fair value of $47.75. 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.