T. Rowe Price is an excellent quality company that potentially offers a long-term investing opportunity. This is due to their long history of high profitability, responsible debt management and ability to retain investors. Although the current volatile market has impacted their earnings, they still have developed strategies to drive long-term growth of asset under management. Taken together, I would rate T. Rowe Price 5/5 stars for quality and 4/5 stars for valuation.
- Fundamentally driven research and disciplined management have provided long-term profitability across various economic conditions with virtually no debt
- Business is very resilient with company provided funds retaining investors even during economic downturns
- Expansion of fund offerings and international client base could drive future asset under management growth
- Under pressure to reduce fees to compete with passive low cost funds
- Earnings are dependent on market value which are sensitive to general economic conditions
Business History and Overview:
T. Rowe Price (NASDAQ: TROW) is a global investment management firm that offers funds, advisory services and retirement plans. T. Rowe Price & Associates was founded in 1937 and was based on charging fees based on assets under management, actively managing client accounts strictly as a fiduciary and focusing investing in growth stocks. In fact, the founder of T. Rowe Price became the known as the “father of growth investing” by Forbes.
T. Rowe Price investment philosophy is based on long-term performance and fundamentals, which they view as indispensable anchors of valuation. The company’s strategy has successfully weathered multiple recessions, changes in investor preferences and various inflation cycles. Currently, T. Rowe Price offers the following funds for clients to invest in:
1) Equity: Provides growth, core, value, concentrated, quantitative and sustainable funds.
2) Fixed Income: Includes cash, low duration, high yield/bank loans, government, securitized and investment grade credit funds.
3) Multi-Assets: Focuses on retirement, global allocation, global income and managed volatility funds.
T. Rowe Price manages these portfolios and provides services to a diversified client base including financial intermediaries, individual domestic investors, domestic retirement plan sponsors and global institutional investors.
Business Quality:
One of the strengths of T. Rowe Price is their long history of profitability:
T. Rowe Price is a very profitable company that has seen strong revenue and income growth of about 10% compounded annually. The growth of this company can be attributed to their success in attracting and retaining a range of diversified investors to their funds. Specifically, the company primarily makes money from investment advisor fees, which is heavily dependent on their assets under managements (AUM):
Over the last ~25 years, the company has been steadily growing their AUM aby about 10% compounded annually. A large part of this increase in AUM has been due to capital appreciation of the general market, with the company’s AUM following changes to the price of the S&P 500. Finally, AUM has also been growing from the company offering more funds and via acquisitions.
Generally, investors tend to keep their money with T. Rowe Price after they start investing. In fact, even major economic downturns do not result in significant withdrawals of assets from T. Rowe Price:
As shown above, more funds came into T. Rowe Price than were withdrawn during the 2008 recession. Currently, only about 3.6% of T. Rowe Price’s total AUM was withdrawn by investors in 2022 (as of Q3). Part of this retention comes from the wide range of funds available for client investment. T. Rowe Price currently offers about 150 funds including growth, value, equity, bonds, small cap, large cap, fixed income, ETFs, retirement and multi-asset funds. They also position their funds to remain competitive, and have waived fees in the past to maintain positive yields for investors. Finally, T. Rowe Price’s research-based strategy has led to strong long-term results:
T. Rowe Price’s funds generally perform well, with the majority of their funds outperforming Morningstar Median and benchmarks. Furthermore, Morningstar raised its rating of T. Rowe Price’s retirement fund to their highest awarded. This was based on T. Rowe Price’s extensive research capabilities and the quality of their fund managers and multi-asset team.
In terms of quality, I would rate the company as excellent (5 out of 5 stars). I believe that T. Rowe Price provides very high-quality research allowing them to provide competitive funds for investors. This is not only reflected by their funds beating many peers over the long-term, but also in how resilient their AUM is to investor withdrawals. Finally, T. Rowe Price is an extremely disciplined dividend aristocrat, with the company having practically no net debt. These advantages have allowed T. Rowe Price to have such impressive and potentially sustainable profitability.
However, this high-quality rating does not mean that the company does not have challenges. One of the biggest challenges to T. Rowe Price is the pressure to provide low cost funds. Over the last 14 years T. Rowe Price has been forced to drop their investment advisory effective fee rate to remain competitive:
Although their investment advisory fee of 0.425% is currently lower than the majority of competitors, it’s still much higher than Vanguard’s 0.06%. Vanguard has been able to grow nearly 7 trillion in AUM by 2021 in part due to their low fees. Additionally, Vanguard funds have excellent performance – with 88% of their mutual funds beating the 10 year average peer group return. The popularity and success of low-cost funds will likely force T. Rowe Price to continue to lower their management fees and strain their profitability.
Another concern is that asset managers are very dependent on general market conditions. When equities perform poorly, then the value of the asset decreases and the advisory fees also decrease. This makes asset managers, including T. Rowe Price, very sensitive to general macroeconomic conditions.
Valuation:
The company’s stock price dropped nearly 45% in 2022, with earnings per share dropping almost 40% (2022 is estimate):
Although the current bear market has severely impacted T. Rowe Price’s earnings, I still believe in their long-term business. Below I list some of my reasoning why I believe that T. Rowe Price will drive long-term value to shareholders:
1) T. Rowe Price has a long history of surviving economic downturns, market bubbles and inflation. Their fundamental driven investing has allowed them to recover earnings quickly after bear markets.
2) The company is very disciplined and maintains low debt giving them flexibility to waive fees and meet investor needs. Despite the current bear market, they are still very profitable and focus on returning capital to shareholders.
3) T. Rowe Price has also expanded their research offices internationally to Shanghia, Hong Kong, Melbourne, Singapore, Sydney and Tokyo. This has allowed T. Rowe Price to expand their products across the Americas, Europe, Middle East, Africa and the Asia Pacific to attract clients globally.
4) They have developed initiatives to expand their research and investing platforms. This includes launching their T. Rowe Price Investment Management platform to streamline their research. Additionally, they have acquired and are launching new funds to increase their competitiveness.
Essentially, T. Rowe Price could be well positioned going forward if the market recovers or if they are successful in attracting new clients (domestically or internationally). Let’s assume the following:
1) This upcoming year (2023) is just as bad as 2022 and the company’s AUM drops another 25%. This would result in a 40% drop in T. Rowe Price’s AUM similar to the decline following the financial crisis (2008).
2) The economy slowly begins to recover by 2024 and that by the beginning of 2026 T. Rowe Price’s AUM has recovered to pre-bear market levels. For reference, the company’s AUM historically recovered within 1 – 2 years after a downturn.
3) T. Rowe Price’s profitability will continue to decline due to pressure to lower fees. This will likely be partly offset by an estimated ~2 million share repurchases annually. I also expect small dividend increases until the AUM recovers.
Based on these assumptions, T. Rowe Price could make an appealing investment opportunity:
| Year | Predicted Dividend ($) | Predicted EPS ($) | “Predicted Fair Price” |
| 2023 | $4.84 | $5.55 | |
| 2024 | $4.88 | $8.41 | $128.50 |
| 2025 | $4.92 | $10.02 | $150.36 |
| 2026 | $4.96 | $11.67 | $175.09 |
| 2027 | $5.00 | $12.16 | $182.36 |
If these assumptions are correct, then at the current share price T. Rowe Price could have the potential to deliver a little over 13% compounded return over the next five years. Interestingly, these assumptions are more pessimistic than analysts for 2023, but are more optimistic over the next few years. Thus, my opinion is that T. Rowe Price should receive a 4 out 5 stars for valuation.
Risks:
Investing in T. Rowe Price does come with a number of potential risks. As mentioned earlier, there has been a trend for investors to move towards lower cost and passive investment vehicles. A number of companies, including Vanguard, have pressured the asset managers to provide higher quality or lower cost funds to remain competitive. Additionally, there is evidence that passive low-cost investment strategies may support better returns compared to the average actively managed fund.
Another risk to the company is how sensitive their business is to general economic conditions. Unlike some other companies covered in this site, changes in the stock market directly decrease AUM leading to reduced profitability. This can make the stock price of many asset managers, including T. Rowe Price, susceptible to market swings.
Finally, changes in regulations, especially retirement offerings, may also negatively affect T. Rowe Price. Frontline PBS covered a special describing how fees and limited transparency in some retirement funds can hurt investors. It is possible that regulators may impose additional requirements on retirement funds to protect investors. Although I believe that T. Rowe Price provides valuable retirement services, new laws could still impact their business.
Final Thoughts:
In my opinion, I believe that T. Rowe Price is an outstanding company. They have a long history of providing value to investors due to their focus on long-term performance and fundamentals. This has allowed the company to weather a variety of economic conditions and to develop an impressive AUM. Additionally, T. Rowe Price has been able to steadily grow their earnings over the last 20 years without any significant debt in part due to the retention of investors to their funds.
I also believe that their strategy to expand their offered funds and internationally client base could help the company continue to grow long-term AUM. Although I am a traditionally more of a value investor, I believe that their growth focus could provide balance to my portfolio.
However, the current volatile market conditions likely could mean that more downside is ahead for T. Rowe Price. This is likely why many analysts covering the company are bearish about T. Rowe Price. From my perspective, I believe that the best opportunity to acquire great companies is when they face challenges. I also believe that T. Rowe Price’s business fundamentals are intact and that they will have long-term success despite the current bear market.
Based on this analysis, I believe that T. Rowe Price is an excellent company (quality rating: 5 out of 5 stars) at great valuation (rating: 4 out of 5 stars). I will personally consider T. Rowe Price a strong buy under $102.9 and a good buy under $114.80.
Disclaimer:
I currently own stocks mentioned in this article including T. Rowe Price at the time of writing this post. Additionally, I am not a financial advisor and I am not providing financial advice. I am sharing my thoughts and processes of selecting stocks for my personal portfolio for fun and entertainment purposes only.
All information provided here is on a “best of my knowledge” basis and may be incorrect. All estimates and models are guesses and may not be accurate. Stocks mentioned here may have additional risks not covered in the post.
Investing in the stock market comes with serious risk of losing money, please consult a professional financial advisor and do due diligence before investing.
