T. Rowe Price Group Remains Attractively Priced

Summary

• T. Rowe Price Group extended its dividend growth streak last February to 34 years, and is poised to extend that streak once again in about 6 weeks.
• Despite the challenging operating environment to date, T. Rowe Price Group managed to deliver 7.8% YoY YTD revenue growth and 2.9% YoY YTD diluted EPS growth.
• T. Rowe Price's balance sheet remains pristine with no long-term debt and over $2 billion in cash and cash equivalents.
• Adding to the case for an investment in T. Rowe Price Group, I estimate that shares of the stock are trading at a 6% discount to fair value.
• Between its 2.4% yield, 7.0-8.0% annual earnings growth, and 0.6% annual valuation multiple expansion, shares of T. Rowe Price Group are poised to meet my 10% annual total return requirement.

In an especially uncertain business environment such as the current one, it is more critical now than ever to focus on investing in businesses that have long track records of increasing their dividends.

One business that fits this profile is T. Rowe Price Group (NASDAQ:TROW), so I will be revisiting the stock for the first time since October 2019.

As I'll discuss below, T. Rowe Price Group's (hereafter referred to as TROW) dividend remains well covered and the growth potential is intact, TROW's operating results YTD have held up very well despite COVID-19 headwinds, and the stock price is reasonable compared to my estimated fair value, which is why I am once again rating shares of TROW a buy at this time.

TROW's Dividend Remains Safe And High-Single Digit Annual Growth Potential Is Intact

Despite the fact that TROW's 2.42% yield is only about 50% higher than the S&P 500's 1.59% yield and that implies that the market believes TROW's dividend is relatively safe for the foreseeable future, I will be using TROW's diluted EPS and FCF payout ratios to further support this argument.

According to TROW's Q3 2020 earnings press release, TROW has generated $6.66 in diluted EPS in the 9 months ended this fiscal year against $2.70 in dividends/share paid out during that time, for a diluted EPS payout ratio of 40.5%.

While this is higher than the 35.2% diluted EPS payout ratio through the first 9 months ended last fiscal year (as per data sourced from page 10 of TROW's Q3 2020 earnings press release), TROW's dividend remains quite safe for the foreseeable future.

Moving to FCF, TROW generated $1.917 billion in operating cash flow against $155 million in capital expenditures, for total FCF of $1.762 billion in the 9 months ended this fiscal year (according to data sourced from page 5 of

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.