Trusted Income from T. Rowe Price

07/20/2017 2:56 am EST


Stephen Mauzy

Income-Investing Specialist, Wyatt Investment Research

I’m no fan of mutual funds. Whether I find them attractive or not, mutual funds are attractive to many investors. Over 9,500 mutual funds hold over $16 trillion of investor assets, explains Steve Mauzy, editor of Wyatt Research's Daily Profit.

And fund investors are attracted to Baltimore-based mutual-fund company T. Rowe Price (TROW). The attraction is understandable.

Financial companies serve as stewards of their customers’ money. Stewardship is earned through trust. Lose the trust, lose the customer. Few financial companies are more deserving of their customers’ trust than T. Rowe Price.

It has also earned income investors’ trust. T. Rowe Price has paid a dividend every year since 1986 public offering. The dividend has been increased every one of those years.

These years include the great financial crisis of 2008 that had all the major commercial and investment banks reeling on the ropes.

Trust reflects in assets under management (AUM). T. Rowe Prices’ AUM exceeds $861 billion. Revenue and earnings are derived from investment advisory fees for managing assets. As AUM goes, so go revenue and earnings.

EPS has grown at a respectable 7.9% average annual rate since 2007. The dividend has grown at an even more respectable rate, 12.5% annually.

What’s more, the regular dividend has twice been supplemented by a special dividend. A $1-per-share special dividend was paid in 2012; a $2-per-share special dividend was paid in 2015. The dividend consumes a conservative 45% of T. Rowe Price’s current earnings.

That the company readily converts earnings growth to dividends growth is understandable. A 30% net margin means much of what is reported on the top line drops to the bottom line.

It also means the cash account is continually replenished. T. Rowe Price carries $1.6 billion in cash and cash equivalents on its balance sheet. This divides to approximately $6.40 of cash per share.

Because cash isn’t paid as interest and principal to bondholders, because there are none, it can be used to increase dividends annually and to buy back shares. Shares outstanding have been reduced 7.8% over the past three years.

T. Rowe Price offers a 3% dividend yield -- an enticing entry yield for a dividend aristocrat. I’m no mutual-fund investors, so I have little attraction to T. Rowe Price’s funds. I am income investor, though. I find T. Rowe Price’s dividend growth very attractive.

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