T. Rowe Price Is The Ultimate Buy And Hold Forever Dividend Aristocrat

Summary

• Owning high-quality stocks through turbulent times is the best medicine for "sleeping well at night."
• In the REIT sector, I have gained considerable personal wealth over the last 12 months by capitalizing on blue-chip bargains.
• Yet, I'm also cognizant that there are other opportunities, beyond REITs, that I should consider in order to diversify my retirement portfolio.
• This is why we wanted to highlight T. Rowe Price (TROW), as one of our highest conviction recommendations for this overvalued market.
• Looking for more investing ideas like this one? Get them exclusively at iREIT on Alpha. Learn More »

This article was co-produced with Dividend Sensei.

As I ponder the state of the U.S. economy and the so-called "return to normal", I'm reminded that owning high-quality stocks through turbulent times is the best medicine for "sleeping well at night."

In the REIT sector, I have gained considerable personal wealth over the last twelve months, by capitalizing on blue-chip bargains like Hannon Armstrong (HASI) +146%, Essential Properties (EPRT) +105%, and Four Corners Properties (FCPT) +88%.

In fact, I consider the 2020 global pandemic to be the quintessential buying opportunity of a lifetime in the REIT sector that has allowed my portfolio to generate annual returns of 22% since 2013.

Yet, I'm also cognizant that there are other opportunities, beyond REITs, that I should consider in order to diversify my retirement portfolio. However, I must always focus on quality and that leads me to my topic for today.

Source

The Dividend Aristocrats are famous for not just delivering the most reliable income, but also of smashing the broader market over time.

Year	Aristocrats Returns	Cumulative Returns	S&P 500 Total Returns	Cumulative Returns
1990	5.70%	105.70%	-3.2%	96.8%
1991	38.50%	146.4%	30.4%	126.2%
1992	10.10%	161.2%	7.6%	135.8%
1993	4.30%	168.1%	10.1%	149.5%
1994	0.90%	169.6%	1.3%	151.5%
1995	34.60%	228.3%	37.6%	208.4%
1996	20.90%	276.0%	22.9%	256.2%
1997	34.50%	371.3%	33.3%	341.5%
1998	16.80%	433.6%	28.6%	439.1%
1999	-5.40%	410.2%	21.0%	531.4%
2000	10.10%	451.7%	-9.1%	483.0%
2001	10.80%	500.4%	-11.9%	425.5%
2002	-9.90%	450.9%	-22.1%	331.5%
2003	25.40%	565.4%	28.7%	426.6%
2004	15.50%	653.1%	10.9%	473.1%
2005	3.70%	677.2%	4.9%	496.3%
2006	17.30%	794.4%	15.8%	574.7%
2007	-2.10%	777.7%	5.6%	606.9%
2008	-21.90%	607.4%	-37.0%	382.4%
2009	26.60%	768.9%	26.4%	483.3%
2010	19.40%	918.1%	15.1%	556.3%
2011	8.30%	994.3%	2.1%	568.0%
2012	16.90%	1162.4%	16.0%	658.8%
2013	32.30%	1537.8%	32.4%	872.3%
2014	15.80%	1780.8%	13.7%	991.8%
2015	0.90%	1796.8%	1.4%	1005.7%
2016	11.80%	2008.8%	12.0%	1126.4%
2017	21.70%	2444.7%	21.8%	1371.9%
2018	-2.70%	2378.7%	-4.4%	1311.5%
2019	28%	3044.8%	31.5%	1724.7%
2020	8.70%	3309.7%	18.4%	2042.0%
Aristocrats Median Return Since 1990	Average Return Since 1990	Annualized Returns Since 1990	S&P 500 Annual Returns Since 1990
11.80%	12.8%	12.30%	10.75%

Click to enlarge

(Source: Ploutos)

That's no surprise to any students of financial science because the aristocrats combine several alpha factors into a potent income and wealth compounding machine.

However, there's one thing more powerful than alpha factors and that's fundamentals.

The S&P 500 and dividend aristocrats are now so overvalued that even with the 6.4% and 7.0% growth analysts expect from them, over time they are likely to deliver far more modest returns.

• 8.0% CAGR S&P 500

• 9.1% CAGR dividend aristocrats

But of course, those are indexes, and as JPMorgan recently pointed out, it's a "stock pickers paradise" right now.

This is why we wanted to highlight T. Rowe Price (NASDAQ:TROW) as one of our highest conviction recommendations for this overvalued market.

As we'll now explain, there are seven reasons TROW represents potentially the single greatest buy and hold forever dividend aristocrat.

One that if owned within a diversified and prudently risk-managed portfolio has the potential to deliver long-term returns 100X better than the S&P 500 over time.

Reason 1: The Highest Quality Good Buy On Wall Street

DK overall quality scores factor in over 100 fundamental metrics covering

• Dividend safety

• Balance sheet strength

• Short and long-term bankruptcy risk

• Accounting and corporate fraud risk

• Profitability and business model

• Long-term sustainability (ESG scores and trends from MSCI, Morningstar, and Reuters'/Refinitiv)

• Management quality

• Dividend friendly corporate culture/income dependability

Dividend Safety

Rating	Dividend Kings Safety Score (72 Safety Metric Model)	Approximate Dividend Cut Risk (Average Recession)	Approximate Dividend Cut Risk In Pandemic Level Recession
1 (very unsafe)	0% to 20%	over 4%	16+%
2 (unsafe average)	21% to 40%	over 2%	8% to 16%
3 (average)	41% to 60%	2%	4% to 8%
4 (safe)	61% to 80%	1%	2% to 4%
5 (very safe)	81% to 100%	0.5%	1% to 2%
TROW	98%	0.5%	1.1%

Click to enlarge

Long-Term Dependability

Company	DK Long-Term Dependability Score	Interpretation	Points
S&P 500/Industry Average	58%	Average Dependability	2
Non-Dependable Companies	31% or below	Poor Dependability	1
Relatively Dependable Companies	32% to 69%	Below to Above-Average Dependability	2
Very Dependable Companies	71% to 80%	Very Dependable	3
Exceptionally Dependable Companies	81% or higher	Exceptional Dependability	4
TROW	90%	Exceptional Dependability	4

Click to enlarge

Overall Quality

TROW	Final Score	Rating
Safety	98%	5
Business Model	90%	3
Dependability	90%	4
Total	94%	12 (Ultra SWAN)

Click to enlarge

(Source: DK Safety & Quality Tool) updated twice per day

T. Rowe Price Is the 7th Highest Quality Master List Company (Out of 491).

(Source: DK Safety & Quality Tool) updated at the end of each day, sorted by overall quality score

TROW's 94% quality score means it's the 7th highest quality company on the Master List and similar in quality to such 10/12 SWANs, 11/12 Super SWANs, and 12/12 Ultra SWANs as

• Adobe

• Lancaster Colony - dividend king

• West Pharmaceutical Services - dividend champion

• Donaldson Company - dividend champion

• American States Water - dividend king, longest dividend growth streak in the world at 65 years

• Expeditors International - dividend aristocrat

• Badger Meter - dividend champion

• Franklin Electric - dividend champion

• Brown-Foreman - dividend aristocrat

• Roper Technologies - dividend aristocrat

• W. W. Grainger- dividend aristocrat

• Aspen Technologies

TROW is the highest quality potential good buy on the master list and the ultimate Buffett wonderful company at a fair price.

All told, our quality score includes 137 fundamental metrics pertaining to dividend safety, long-term dependability, and total returns. Every metric was selected based on:

• Decades of empirical data

• The experience of the greatest investors in history

• Eight rating agencies

• And what blue-chip economists and analyst firms consider most closely correlated to a company's long-term success.

No less than Ben Graham, the father of securities analysis considered qualitative factors critical to making prudent long-term investing decisions.

...a satisfactory statistical exhibition is a necessary though by no means a sufficient condition for a favorable decision by the analyst." - Benjamin Graham, Security Analysis (1951 ed.), Page 76

In other words, Graham considered a combination of quantitative and qualitative analysis, looking at the past, present, and likely future, to be the optimal strategy for making sound long-term investments.

• Dividend Kings uses risk ratings from eight of the world's most reputable agencies

• If fundamentals weaken our model will know it and our scores, ratings, and recommendations will change accordingly

Our goal is to ensure we see fundamental deterioration coming before dividends get cut and a company, in a worst-case scenario, goes bankrupt.

• Even dividend aristocrats can fail (just ask GE or CTL investors)

• Even dividend aristocrats can go bankrupt (just ask Kmart or Winn-Dixie investors)

There are no sacred cows in the Dividend Kings universe. Where the fundamentals lead, we always follow.

• The essence of financial science

Reason 2: One Of The Best Growth Profiles of Any Aristocrat

2020 Results And Consensus Growth Forecasts

Metric	2020 Actual Results	2021 consensus growth	2022 consensus growth	2023 consensus growth
Dividend	18%	20% (official)	5%	5%
EPS	15%	21%	5%	6%
Free cash flow	15%	11%	4%	9%
EBITDA	17%	23%	4%	3%
EBIT (operating income)	19%	25%	4%	0%

Click to enlarge

(Source: F.A.S.T Graphs, FactSet Research)

In the worst recession in 75 years, TROW reported one of its strongest years ever.

• S&P 500 earnings -14% for 2020

• TROW the mirror image

• Dividend hikes in 2020 and 2021 were 4X what analysts were expecting

• Analysts currently expect 6% CAGR growth through 2023

• And TROW's very safe and low 30% FCF payout ratio means it may continue hiking at double-digits for many more years

• 50% FCF payout ratio is the safety guideline for this industry

• Correlated with low risk of dividend cuts in historically average recessions

2021's growth is expected to be even stronger, and management's 20% dividend hike, TROW's 35 consecutive annual increase, indicates it's feeling confident about 2021.

• The strongest economy in 36 years

• End of the pandemic

• Record stimulus ($1.9 trillion may pass next week)

• Infrastructure spending ($2 to $3 trillion over 4 years)

• Rising interest rates (boosting financial company profits)

But of course, fortunes aren't made over a few years, but over decades, which means considering the long-term growth consensus profile.

(Source: FactSet Research Terminal)

(Source: Yahoo Finance, Reuters'/Refinitiv) 13/17 analysts

• 17 analysts cover TROW

• Collectively these experts know TROW better than anyone except the world-class management team

• Analysts expect 13.8% to 15.5% CAGR long-term returns from TROW

Few aristocrats are expected to grow at such torrid rates, basically 2X as fast as the S&P 500.

TROW Vs S&P 500 Consensus Inflation-Adjusted Forecast: $1,000 Investment

Time Frame (Years)	6% LT Inflation-Adjusted Returns (S&P Consensus)	11.5% Inflation-Adjusted Returns (low end of LT consensus range)	16% Inflation-Adjusted Returns (LT analyst consensus)
5	$1,331.93	$1,723.35	$2,100.34
10	$1,774.02	$2,969.95	$4,411.44
15	$2,362.87	$5,118.27	$9,265.52
20	$3,147.16	$8,820.58	$19,460.76
25	$4,191.79	$15,200.98	$40,874.24
30	$5,583.14	$26,196.67	$85,849.88
35	$7,436.33	$45,146.11	$180,314.07
40	$9,904.63	$77,802.70	$378,721.16
45	$13,192.23	$134,081.55	$795,443.83
50	$17,571.06	$231,069.90	$1,670,703.80

Click to enlarge

Time Frame (Years)	Ratio S&P vs TROW 11.5% CAGR	Ratio S&P vs TRP 16% CAGR
5	1.29	1.58
10	1.67	2.49
15	2.17	3.92
20	2.80	6.18
25	3.63	9.75
30	4.69	15.38
35	6.07	24.25
40	7.86	38.24
45	10.16	60.30
50	13.15	95.08

Click to enlarge

• If TROW grows as expected, it will deliver between 4 and 16X more inflation-adjusted wealth compounding than the S&P 500 over the next 30 years.

• And over a long enough time period, 51 years, potentially as much as 100X the income and wealth compounding of the S&P 500

Of course, these are only if analysts are right, and TROW grows at about 16% CAGR over time.

Fortunately, analysts, courtesy of guidance from the best management team in the industry, tend to be accurate at forecasting TROW's growth rates.

Analysts Scorecard

• The one thing for certain is that analyst consensus estimates are wrong

• The question is by how much

Thanks to very good management guidance, analysts are very accurate at forecasting TROW's growth rates over time.

• Margins of error, excluding the Great Recession, over the last decade are less than 15% to the downside, 30% to the upside

• The long-term growth consensus range: 13.8% to 15.5% CAGR

• Up from 13% to 13.8% a month ago

• The margin of error adjusted long-term analyst growth consensus range: 11% to 22% CAGR

• Up from 11% to 19% a month ago

(Source: F.A.S.T Graphs, FactSet Research)

The 17 analyst consensus from FactSet is that TROW will grow at a 15.5% CAGR over time, a similar rate as the last 18-years.

• The asset management is effectively infinitely scalable

• Allowing for sustained rapid growth for decades

• We consider TROW's 15.5% CAGR growth consensus to be reasonable given its secular growth catalysts and plans

But just because analysts have tended to be accurate at forecasting TROW's hyper-growth for decades, doesn't mean we can just assume 15% to 16% growth will actually happen.

This is where the growth catalysts are needed to power this legendary dividend growth blue-chip to rich retirement funding glory.

Reason 3: A Highly Scalable And Incredibly Lucrative Business Model

(Source: Gurufocus Premium)

There are very few companies on earth with stronger balance sheets or more lucrative business models than TROW.

(Source: Gurufocus Premium)

• Z-score is 84% to 92% over a 30-year period at forecasting bankruptcies over the next year years

• 3+ = very safe

• TROW's 13-year median Z-score is 16 and its 15-year average is 18.

• It's currently more than 3X the very safe level

Combine TROW's advanced accounting metrics with its $2.2 billion in cash on the balance sheet and $3.5 billion in 2021 consensus FCF, and you have effectively a AAA balance sheet.

• TROW doesn't historically use much or any debt

• But its historical debt and advanced accounting metrics are far superior to BlackRock, an AA-rated asset management

(Source: Gurufocus Premium)

Return on capital = EBTI (operating income)/operating capital (how much money it takes to run the business for a year).

• Joel Greenblatt's gold standard proxy for company quality and moatiness

• 13% was the average ROC for the S&P 500 in 2019

• 82% is the DK Master List average ROC

• 113% = average blue-chip quality ROC

• TROW's 13-year median ROC is 221%

• For every $1 it takes to operate the business it generates $2.21 in pre-tax profits

According to Joel Greenblatt, who delivered 40% CAGR total returns for 21 years using an advanced version of quality + value, TROW is one of the highest quality asset managers on earth. In fact, it's one of the highest quality companies of any kind, in the world.

(Source: Gurufocus Premium)

Asset management is a highly lucrative industry, about 2X the average returns on capital of the S&P 500.

• TROW is consistently in the top 10% of its peers

What allows TROW to maintain such a wide and stable moat? Especially when passive investing has become so powerful and dominant over the last decade?

TROW is No. 1 in active management, on a risk-adjusted basis relative to its peers according to Morningstar ratings.

T. Rowe Price's biggest advantage over peers has been the level and consistency of its investment performance.

The firm currently has 59% of its rated U.S. mutual funds (across primary share classes) rated 4 or 5 stars.

Additionally, 84% of AUM in the firm's rated U.S. mutual funds (across primary share classes) closed out 2020 with an overall rating of 4 or 5 stars.

With most broker/dealer and advisory platforms tending to give deferential treatment to 4- and 5-star funds, T. Rowe Price is well-positioned.

With solid three- and five-year relative investment performance generated on a consistent basis also tending to be an important benchmark for the gatekeepers of retail-advised and institutional platforms, T. Rowe Price is also well-positioned, with more than three-quarters of its funds tending to outperform peers on a 3-, 5-, and 10-year basis for much of the past two decades.

With 83%, 79%, and 77% of T. Rowe Price's sponsored U.S. mutual funds beating their passively managed peers on a 3-, 5-, and 10-year basis, respectively, at the end of 2020, we expect the firm to continue to generate better organic growth from its active fund platform than the industry as a whole." - Morningstar

(Source: investor presentation)

When 90% of your US funds are beating their peers and 77% are beating their benchmarks then steady net inflows are to be expected.

• Active management will never die

• It will just be consolidated by the most successful operators

• And TROW is No. 1 in performance

(Source: FactSet Research Terminal)

• Rapid and accelerating net inflows expected in 2021, 2022, and 2023

• AUM rising to over $1.9 trillion by 2023

• Median net inflows $2.3 billion per year

• Analysts expect that to rise rapidly as TROW's new products and superior results grow AUM and thus fee revenue

The firm has recorded net long-term outflows in only 15 calendar quarters the past two decades." - Morningstar

In 81% of quarters for the last 20 years, TROW has been growing organically.

(Source: investor presentation)

But of course, actual AUM has grown far faster. From 2010 to 2019 AUM at TROW grew 12% CAGR, 6X as fast as net inflows.

• Over time, management thinks it can sustain 2% organic growth

• Resulting in similar AUM growth as over the past decade

• EPS growth over the last decade has been 16% CAGR

• Same as the LT median consensus of 15.5% CAGR

Here's management's plan to drive to keep that growth train chugging along.

(Source: investor presentation)

• Continued expansion into some of the most popular active ETFs in America

• Global expansion

• Expansion into ESG products ($80 trillion addressable market over the next few years)

• Machine learning to improve results even more over time

Do you think running a global empire like TROW, spanning 16 countries, is easy? Absolutely not. Fortunately, TROW investors benefit from the best management team in the industry.

Reason 4: The Best Management Team In The Industry

We 100% agree with Morningstar that TROW's management culture is exceptional and investors can sleep well at night knowing these executives are handling their hard-earned savings.

Our stewardship rating for T. Rowe Price is Exemplary.

T. Rowe Price is unique among the publicly traded U.S.-based asset managers in that it has traditionally been run by a group of top officers (the management committee) who consult one another before making major decisions.

President and CEO William Stromberg started working for T. Rowe Price in 1987 and previously served as head of equity (2008-15), director of U.S. equity (2007-15), and director of global equity research (2004-15) before taking the top job at the firm in January 2016. He became chairman of the board of directors at the end of April 2019.

The management committee, which is responsible for guiding, implementing, and reviewing major policy and operating initiatives, has in our view done an exemplary job over the years.

Capital allocation has been prudent, with the company carrying little to no debt on its books, engaging in very little acquisition activity, and tending to return cash to shareholders as share repurchases and dividends.

In the asset-management industry, debt can be a net negative, as was seen during the 2008-09 global financial crisis when several firms that were carrying larger levels of debt had to scramble to raise capital (including issuing additional equity) after seeing revenue and profitability drop dramatically in response to the market decline, so T. Rowe Price's financial prudence has been commendable.

Compensation, which tends to be the biggest cost center for asset managers, has tended to be reasonable at T. Rowe Price, with executive pay being in line with most of the larger asset managers we cover.

The only issue we have with the firm is that it has been a heavy user of stock options over the years, which not only dilutes existing shareholders but also blunts the impact of its share-repurchase programs." - Morningstar (emphasis added)

(Source: investor presentation)

• TROW's average buybacks total 2% net share reductions per year over the last 5 years

• Average PE they paid was 10X

• Vs 14 to 17 historical fair value

• The best fund managers in the world are buying their own stock at bargain-basement prices

The buyback alone points to very conservative and disciplined financial scientists running the show.

TROW has also been adapting since its founding in 1937, to all manner of industry disruption.

As part of ongoing efforts to enhance the company's competitive positioning, management has been willing to evolve, though, focusing for much of the past several years on building additional scale through new investment products, expanding the reach of its investment advisory business by further penetrating domestic distribution channels (like the retail-advised channel) and moving into non-U.S. markets (especially emerging and developing economies in the Asia-Pacific region), and bolstering technology in an effort to improve performance outcomes, drive down incremental costs, and improve product distribution.

Chairman and CEO Bill Stromberg maintain an investment focus while recognizing that the business must evolve to flourish in an industry that's gravitated toward passive investing.

All of this explains why T. Rowe Price receives some of the highest marks for corporate culture among the U.S.-based asset managers we cover. Our manager research group has also consistently awarded it a Positive Parent rating, owing not only to its ability to produce repeatable investment strategies but to prudently adapt to the changing competitive landscape all while attracting and retaining quality investment talent.

We continue to believe that T. Rowe Price is well-positioned to navigate the headwinds that the U.S.-based asset managers will face during the next decade and expect it to be one of the rare organic growth generators in the group." - Morningstar (emphasis added)

That includes launching new passive funds, such as target-date funds.

Target-date retirement portfolios remain the largest driver of growth for T. Rowe Price.

During the past decade, the firm has pulled in just under $100 billion in managed assets via inflows into its target-date retirement portfolios, which currently account for 23% of firmwide AUM.

The company has also made some headway in the retail advice channel by highlighting its record of active fund performance to advisors, many of whom are more focused on low-cost index funds and exchange-traded funds as they've moved to fee-based account models to serve their clients.

T. Rowe Price also remains focused on expanding its international business (currently around 7% of total AUM), making strategic investments in products and personnel as it looks to build up its brand as well as broaden its reach in the EMEA and Asia-Pacific regions.

And with its technology investments, the firm aims to be able to not only improve investment performance and better target end users but build tools that allow advisors to build better portfolios." - Morningstar (emphasis added)

• Passive investing? They became one of the leaders in target-dated funds

• Rise of active ETFs? TROW is rapidly coming to dominate that niche

• Explosive interest in ESG? TROW's industry experts are planning ESG products that are about 80% likely to outperform their peers, just as with their funds

Are there risks to active managers? Absolutely, no company is without a complex risk profile that investors must be comfortable with (see the risk section).

• Portfolio management teams have an average of 23 years of investment experience and 17 years of tenure with T. Rowe Price

• Members of the Management Committee have served an average of 16 years with the firm

(Source: investor presentation)

The board of directors is equally skilled and shareholder friendly. It's 100% composed of CEOs that bring a diverse background that's helped TROW thrive for over 80 years.

How do rating agencies feel about TROW's governance? To answer that let's take a look at its ESG risk scores from MSCI, Morningstar, and Reuters'/Refinitiv.

MSCI

MSCI rates over 2,800 global companies on 37 ESG metrics, using a quantitative and qualitative approach, just as all the rating agencies do, and Ben Graham recommended.

Our global team of 185 experienced research analysts assesses thousands of data points across 37 ESG Key Issues, focusing on the intersection between a company’s core business and the industry issues that can create significant risks and opportunities for the company. Companies are rated on an AAA-CCC scale relative to the standards and performance of their industry peers.

The MSCI ESG rating model seeks to answer four key questions about companies:

• What are the most significant ESG risks and opportunities facing a company and its industry?

• How exposed is the company to those key risks and/or opportunities?

• How well is the company managing key risks and opportunities?

• What is the overall picture for the company and how does it compare to its global industry peers?" - MSCI

(Source: MSCI)

The ESG scores you find from the best risk-assessors in the world are not opinions based on political correctness. They use a quantitative approach to fundamental company risk analysis. One is based on decades of historical data pertaining to minimizing the risk of fundamental deterioration, bankruptcy, and stock/bond investors getting wiped out.

• ESG risk ratings + trends make up about 20% of the overall DK quality score for most companies that have an ESG rating from MSCI & Morningstar/Sustainalytics

(Source: MSCI)

• MSCI considers TROW in the top 32% of its peers on materially financial ESG risk

• 42.2% of that score is corporate governance

Morningstar

• Morningstar/Sustainalytics cares about material ESG variables that are historically correlated to a company's enterprise value (market cap + net debt)

• Financial risk NOT political/personal ethical opinions are what Morningstar assesses

• Morningstar/Sustainalytics uses a 100 point material ESG risk scale

Reuters'/Refinitiv

Reuters'/Refinitiv also provides ESG financial risk ratings.

• Over 150 industry experts covering over 7,000 global companies

• Based on 400-plus fundamental metrics

• And 178 materially important financial ESG risk factors

(Source: Refinitiv)

(Source: Interactive Brokers)

TROW's long-term financial ESG risk, including corporate governance and management, scores above-average to excellent from all three rating agencies.

• TROW will be joining the new DK strong ESG corporate watchlist later in 2021

• Average or better ESG risk rating from all three agencies

• Or above-average from 2+

• A 2019 study from Research Affiliates found 64% correlation between ESG risk scores

• Vs. 99% for credit ratings

• Any company making the strong ESG watchlist will be in the top 26% of its industry

• Effectively a "wide ESG risk moat"

TROW is the deepest bench in its industry with a track record of successfully adapting and overcoming every challenge that comes down the road.

(Source: investor presentation)

How shareholder-friendly is this exceptional management team? Over the long term, they return 90% of profits as dividends and buybacks. But only after making sure to invest in growing the business at double-digit rates.

So let's summarize

• 35-year dividend growth streak aristocrat

• 12/12 Ultra SWAN quality

• 15.5% CAGR hyper-growth consensus

• Industry-leading fund returns

• Industry-leading management culture

• Industry-leading profitability that's stable over time

• Industry-leading C-suite resiliency (any single executive leaving won't significantly impact the management committee)

Does this sound like a company that deserves to trade at a premium? Absolutely it does. But today TROW actually trades at a modest discount that compensates you well for its overall quality and risk profile.

Reason 5: A Wonderful Company At A Fair Price

Metric	Historical Fair Value Multiples (9-years)	2020	2021	2022	2023
5-Year Average Yield	2.80%	$129	$154	$162	$170
13-Year Median Yield	2.24%	$161	$193	$203	$213
25-year average yield	1.94%	$186	$223	$234	$245
Earnings	15.5	$154	$186	$194	$205
Free Cash Flow	13.6	$156	$172	$179	$195
EBITDA	10.3	$139	$171	$178	$184
EBIT (operating income)	11.0	$139	$174	$181	$181
Average		$150	$180	$188	$196
Current Price	$169.58
Discount To Fair Value		-13%	6%	10%	14%
Upside To Fair Value		-12%	6%	11%	16%
Annualized Total Return Potential (including dividends)		NA	9%	9%	8%

Click to enlarge

TROW is trading at a 6% discount to this year's fundamental consensus estimates and current dividend.

• A return to average historical fair value by the end of 2023 would result in an 8% CAGR total return (including dividends)

• About 4X better than the S&P 500

• 2021 fair value range: $154 to $223

• 2021 Harmonic Average Fair Value (smooths out outliers): $180

• Fair value uncertainty: 38% medium

Reason 6: Long-Term Returns To Make Grown Men Weep With Joy

Here are the kind of returns you can reasonably expect from buying TROW today.

T. Rowe Price 2023 Consensus Return Potential

(Source: F.A.S.T Graphs, FactSet Research)

If TROW grows as analysts expect through 2023, and returns to historical fair value, then analysts expect

• 28% total returns

• 9.0% CAGR returns

• Vs 1.7% CAGR S&P 500

Over the next three years or so, TROW has 5.3X the return potential of the highly overvalued S&P 500.

T. Rowe Price 2026 Consensus Return Potential

(Source: F.A.S.T Graphs, FactSet Research)

If TROW grows as analysts expect through 2026, and returns to historical fair value, then analysts expect

• 103% total returns, doubling your investment

• 12.9% CAGR returns

• Vs 5.8% CAGR S&P 500

Over the very long term, here's what analysts expect.

• 2.5% yield +15.5% CAGR growth = 18.0% CAGR total return potential (13.5% to 23.5% CAGR range)

• Vs 8.0% CAGR S&P 500 and 9.1% CAGR dividend aristocrats

TROW offers the potential to earn long-term total returns on par with the greatest investors in history.

• Hyper-growth blue-chip dividend growth investing at its finest

• The ultimate wonderful company at a fair price

And in case you think 18% CAGR annual returns for decades is not realistic, that's what TROW has delivered over the past three decades.

TROW Historical Returns Since 1990

(Source: Portfolio Visualizer)

• TROW was yielding 2.1% in 1990

• The yield on cost in 2021 was 45%

• Over 30 years, TROW has repaid an initial investment 6X

• And has grown inflation-adjusted wealth 80X

• Analysts expect TROW to deliver similar returns over time

• From bear market lows returns as strong as 28% CAGR for 15 years, more than 2X the S&P 500's best 15-year return

• 40X your investment over 15 years

Reason 7: As Close To A Perfect Dividend Growth Investment As You Can Find Today

We never recommend a company, much less put my own money at risk, without first knowing exactly how prudent a potential investment it is relative to the S&P 500, most people's default alternative.

The investment decision score is based on valuation and the three core principles of all successful long-term investors.

Ticker	Quality Score	Safety Score		Investment Grade	Today's 5+ Yr Risk-Adjusted Expected Return
TROW	12	5		A+	9.67%
Goal	Scores	Scale	Interpretation
Valuation	4	Good Buy	TROW's 6.28% discount to fair value earns it a 4-of-4 score for valuation timeliness
Preservation of Capital	7	Excellent	TROW's credit rating of AAA implies a 0.07% chance of bankruptcy risk and earns it a 7-of-7 score for Preservation of Capital
Return of Capital	10	Exceptional	TROW's 22.15% vs. the S&P's 10.80% 5-year potential for return via dividends earns it a 10-of-10 Return of Capital score
Return on Capital	10	Exceptional	TROW's 9.67% vs. the S&P's 2.90% 5-year risk-adjusted expected return (RAER) earns it a 10-of-10 Return on Capital score
Total Score	31	Max score of 31		S&P's Score
Investment Score	100%	Exceptional		73/100 = C (Market Average)
Investment Letter Grade	A+

Click to enlarge

(Source: Dividend Kings Automated Investment Decision Tool)

TROW is one of the most reasonable and prudent hyper-growth dividend blue-chips you can buy in this overvalued market. It's as close to a perfect dividend growth stock as you can find today offering:

• 1.6X the S&P 500's yield

• With a much safer dividend (35 dividend growth streak)

• About 2X the long-term growth consensus

• A valuation that's 38% better than the S&P 500

• 2.1X higher 5-year dividend return potential

• 3.3X higher 5-year risk-adjusted expected returns

• 10% better long-term annual return potential

That's assuming you're

• Comfortable with the risk profile

• Own it within a diversified and prudently risk-managed portfolio

Risks To Consider: Why TROW Isn't Right For Everyone

Fundamental Risk Summary

With more than 80% of annual revenue derived from management fees levied on AUM, dramatic market movements, shifts in product mix, and/or changes in fund flows can have a significant impact on operating income and cash flows.

T. Rowe Price's investment offerings are overwhelmingly tied to U.S. equity markets, with more than three-fourths of its AUM invested in equity and balanced strategies.

Additionally, 10 T. Rowe Price funds--Blue-Chip Growth, Growth Stock, Capital Appreciation, Mid-Cap Growth, New Horizons, Value, Emerging Markets Stock, Overseas Stock, Equity Income, and Institutional Large-Cap Growth--accounted for more than 25% of the firm's AUM at the end of 2020, as well as 35% of the company's investment advisory revenue during the year.

As T. Rowe Price increases its investment in overseas asset managers, especially in emerging and developing economies like China and India, it is exposing itself to myriad cultural, economic, political, and currency risks that exist in the markets these managers serve." - Morningstar

Valuation Risk is Moderate

• 38% fair value range and 14 to 17 historical fair value PE range in the modern passive management era

(Source: FAST Graphs, FactSet Research)

The currently blended PE of 16.4 and 14.0X forward earnings means that TROW is trading within its fair value range.

• Buying a world-class hyper-growth aristocrat at fair value seldom results in poor long-term results

However, even the highest quality companies on earth can experience short-term volatility that can lead to unnecessary losses.

Volatility caused by money managers who speculate irrationality with huge sums will offer the true investor more chance to make intelligent investment moves. He can be hurt by such volatility only if he is forced, by either financial or psychological pressures, to sell at untoward times." - Warren Buffett (emphasis added)

TROW's average 15-year volatility is 29%.

• Average standalone company is 28%

• Average aristocrat is 24%

This means that in any given year, TROW investors should be prepared for it to fall by 30% to 35%.

TROW Peak Declines Since 1990

(Source: Portfolio Visualizer)

TROW is without question one of the highest quality and safest dividend stocks on Earth. But "safe" doesn't mean "can't fall a lot."

(Source: JPMorgan Asset Management)

TROW has delivered some of the greatest investment returns of all time. Yet along the way, there were big and scary drops.

Your Approach To Volatility Determines Your Long-Term Success

• Poor investors fear volatility and pray for luck in the stock market

• Good investors tolerate volatility and trust stocks go up over time

• Great investors understand volatility and own SWAN portfolios designed to avoid becoming forced sellers for emotional or financial reasons during market corrections

• Exceptional investors embrace volatility and harness it to achieve their long-term financial dreams

Here are the risk management guidelines I use to run all the DK portfolios and my three retirement portfolios.

Whatever your personal risk management rules are, trust in those, and not market timing to protect you from inevitable market downturns.

Bottom Line: T. Rowe Price Is The Ultimate Buy And Hold Forever Dividend Aristocrat

Think it's impossible to find a world-class quality, fast-growing dividend aristocrat at a decent price in today's market? Think again, because something great always is on sale.

• TROW is as close to a perfect dividend growth stock as exists on Wall Street today

We can't think of any company that combines quality, profitability, exceptional management, and supreme dividend safety like TROW does.

Now add in a 15.5% CAGR long-term growth consensus and a realistic way of achieving that? All for a 5% discount to fair value?

That's not just a good deal, that's a potentially exceptional one. Just the kind of prudent long-term investment that can lead to a rich retirement for you and your children.

Because when you combine so many wonderful alpha factors together, you can achieve remarkable income and wealth returns. But it's not magic, it's just math. Or specifically, the kind of disciplined financial science that all the greatest investors in history have used to become legends.

Author's note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.

Analyst’s 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.

Dividend Sensei owns TROW.