This article originally appeared on The DIV-Net September 19, 2011.
T. Rowe Price Group Inc. 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 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 3.) above. The stock is trading at a 21.3% premium to its calculated fair value of $44.1. 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:
- Free Cash Flow Payout
- Debt To Total Capital
- Key Metrics
- Dividend Growth Rate
- Years of Div. Growth
- 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.
Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2001-2004, 2002-2005, 2003-2006, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1986 and has increased its dividend payments for 24 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:
- NPV MMA Diff.
- Years to > MMA
TROW earned a Star in this section for its NPV MMA Diff. of the $3,239. This amount is in excess of the $1,100 target I look for in a stock that has increased dividends as long as TROW has. If TROW grows its dividend at 15.0% per year, it will take 5 years to equal a MMA yielding an estimated 20-year average rate of 4.1%.
Memberships and Peers:
TROW is a member of the S&P 500 a member of the Broad Dividend Achievers™ Index. The company's peer group includes: The Federated Investors (NYSE:FII) with a 5.8% yield, Eaton Vance (NYSE:EV) with a 3.2% yield and BlackRock Inc. (NYSE:BLK) with a 3.5% yield.
TROW did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks TROW as a 4 Star-Strong stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $78.56 before TROW's NPV MMA Differential decreased to the $1,100 minimum that I look for in a stock with 24 years of consecutive dividend increases. At that price the stock would yield 1.6%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,100 NPV MMA Differential, the calculated rate is 11.5%. This dividend growth rate is well below the 15.0% used in this analysis, thus providing a margin of safety. TROW has a risk rating of 1.75 which classifies it as a Medium risk stock.
TROW is well-positioned as an asset manager with a strong market share and a well-respected brand. It consistently produces net client inflows based on the relative performance of its funds with over 70% of its funds in the top half of their categories on a five-year performance basis.
Given low short-term interest rates and the significant cash on the balance sheet, TROW was able to increase its share buyback in Q2/2011 to $210 million, from $31 million in the Q1/2011. The stock's current valuation is 21% above my calculated fair value of $44.10. I am watching this stock closely, but unwilling to buy at this premium and yield.
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.
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.