T. Rowe Price Has Been Increasing Dividends For 30 Years

| About: T. Rowe (TROW)

Summary

T. Rowe Price recently announced a quarterly dividend of $0.54 per share with an ex-dividend which is on September 13th.

The company has been increasing its dividend for the past thirty years with a five-year dividend growth rate of 14%.

Earnings growth projections for the company are pretty decent for an asset management company with a one-year growth rate of 14.8% and five-year growth rate of 7.9%.

A dividend is just one of many ways a company can reward its shareholders by paying them out in cash. The investor can then choose to take the cash and run, reinvest it in the company, or invest it in a different company. After a company has made its net income for the quarter it has the choice of what to do with it and the choices are usually to either plow the money back into the business for other investments or pay some of that money back to the shareholders in the form of a dividend.

Most Recent Dividend Announcement

T. Rowe Price (NASDAQ:TROW) recently announced a quarterly dividend of $0.54 per share with an ex-dividend which is on September 13th, making the must own date September 12th. This dividend announcement is on par with what was announced the previous quarter. The dividend is going to be payable to owners on September 29th. The dividend is currently good for a 3.1% yield on today's share price of $69.27. Based on trailing earnings, the dividend is good for a payout ratio of 52% which is pretty normal for a dividend aristocrat. From a cash flow perspective, the company has paid $536M in dividends over the past twelve months on operating cash flow of $588M which is good for a 91% operating cash flow payout ratio.

Potential Future Dividends

The company has been increasing its dividend for the past thirty years with a five-year dividend growth rate of 14%. Over the past five years the company has been increasing its dividend during the month of March and it wouldn't surprise me if it did the same thing in 2017.

The company is projected to earn $4.84 per share in earnings for next year and if the EPS payout ratio remains the same at 52%, then the company should distribute about $2.52 annually starting March 2017(or a 16.7% increase). That amount seems pretty reasonable and I do believe the 52% payout ratio is sustainable for the long term.

Earnings growth projections for the company are pretty decent for an asset management company with a one-year growth rate of 14.8% and five-year growth rate of 7.9%. With that said, I believe a 7% increase to the dividend next year would be much better than the 3.8% increase investors received this year. A 7% increase would constitute an annual dividend of$2.32 for 2017 if it increases the dividend in March again next year.

Dividend Valuation

Now let's get to the meat and potatoes, the dividend valuation model to determine a price that the stock should be at based on the dividend alone. Since I just mentioned that the company has been increasing its dividend for the past thirty years we know that it has a pretty good history of increasing it and should continue to increase it going into the future. The dividend growth model equation takes the form of:

Annual Dividend [D]

Rate of Return [R] - Dividend Growth rate [G]

Where D is equivalent to the current dividend, R is the rate of return desired by the investor, and G is the anticipated growth rate of the dividend. For the D value I'm going to use the existing dividend rate of $2.16.

For the R value I'm going to use 14.8% because it is next year's earnings growth estimate. For the G value of the equation I'm going to use a dividend growth rate of 7% because I definitely believe the company could increase the dividend by that much at least for the next year to keep investors happy. When you plug and chug all the numbers you get a stock value of $28 which makes the stock overvalued by about 60% from today's price of $69.27. For reference, the 52-week low on the stock was $63 during January of this year.

The dividend discount model is just one of many ways to value a company and should be taken into consideration while trying to evaluate a company. Assumptions are always made while using valuation models and I believe I've selected some of the most conservative criteria for the valuation in this article. This valuation model shows the value of the dividend stream and that the stock is overvalued based on the dividend alone. The company has been around for quite some time and can definitely afford to increase the dividend when March 2017 comes around.

Other Musings

The company currently trades at a trailing 12-month P/E ratio of 16.74, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 14.3 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $4.84 per share and I'd consider the stock inexpensive until about $73 on a P/E valuation method. The 1-year PEG ratio (1.13), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is fairly priced based on a 1-year EPS growth rate valuation method of 14.79%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 14.79%.

Most recently the company sued Valeant (NYSE:VRX) saying the company was fraud and had a faulty business model. Remember, T. Rowe is a large mutual so this just isn't going to be a run of the mill class action lawsuit; T. Rowe lost billions of dollars in assets due to the flawed rollup scheme Valeant was running. This more than likely won't be the only lawsuit of this kind against Valeant either.

I actually initiated my position in the company in late August for my second foray in the name and have been pretty ambivalent with the purchase thus far, but it has been too short of a holding period. But I never look to initiate a full position in a name immediately and think the stock is a buy as long as it is below $71 (which is the midway point of the 52-week range). I never like to dive full bore into a name, I always buy in increments.

I swapped out of V.F. Corporation (NYSE:VFC) for T. Rowe during the portfolio change-out in the third quarter of 2016 because I had a good gain in it (5% or 24% annualized) and felt that it might lag the rest of the market for the coming three months.

The chart below compares how V.F. Corporation and T. Rowe have done against each other and the S&P 500 since I swapped the names. It does look like the trade has worked out from the chart and that is because financials have caught a bid recently. However, I am actually down 0.5% on the name because it has been a short holding period so far.

When it is all said and done, it matters what the stock has done in an investor's portfolio at the end of the day. For me, T. Rowe is one of the larger positions and has been flat for me, while the position occupies roughly 10.4% of my portfolio. I own the stock for the dividend generation portion of my portfolio, and I will continue to hold onto the stock for now. I am up 9.3% since the inception of my portfolio, while the S&P 500 is up 4.8%. Below is a quick glance of my portfolio and how each position is performing. Thanks for reading and I look forward to your comments.

Company

Ticker

% Change incl. DIV

Portfolio

Priceline Group Inc.

(NASDAQ:PCLN)

24.61%

7.01%

Electronic Arts Inc.

(NASDAQ:EA)

11.44%

4.72%

SLW OCT 21, 2016 27.00 CALL (Open)

(SLW)

5.46%

1.03%

AbbVie Inc.

(NYSE:ABBV)

3.64%

3.89%

Target Corp.

(NYSE:TGT)

3.01%

8.22%

Southwest Airlines Co.

(NYSE:LUV)

0.88%

11.79%

KLA-Tencor Corporation

(NASDAQ:KLAC)

0.20%

6.04%

T. Row Price Group, Inc.

-0.52%

10.16%

SIG OCT 21, 2016 85.00 CALL (Open)

(NYSE:SIG)

-2.65%

1.46%

DEO OCT 21, 2016 120.00 CALL (Open)

(NYSE:DEO)

-5.29%

0.53%

Delta Air Lines, Inc.

(NYSE:DAL)

-8.35%

12.46%

Gilead Sciences Inc.

(NASDAQ:GILD)

-11.74%

15.74%

Signet Jewelers Limited

-12.27%

10.08%

DAL SEP 16 2016 40.00 CALL (Open)

-77.12%

0.05%

GILD SEP 16 2016 85.00 CALL (Open)

-95.22%

0.02%

Cash

$

6.82%

Disclaimer: This article is in no way a recommendation to buy or sell any stock mentioned. This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am/we are long TROW.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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