September 9, 2011
Written By Ingrid Hendershot
“Founded in 1937, Baltimore-based T. Rowe Price Group, Inc. (TROW – yield 2.50%) is a global investment management organization with $520.9 billion in assets under management as of June 30, 2011. The organization provides a broad array of mutual funds, subadvisory services and separate account management for individual and institutional investors, retirement plans and financial intermediaries. The organization also offers a variety of sophisticated investment planning and guidance tools. T. Rowe Price’s disciplined, risk-aware investment approach focuses on diversification, consistency and fundamental research.
“The late Thomas Rowe Price, Jr. is considered to be the ‘father of growth investing.’ With lessons learned during the Great Depression, he founded T. Rowe Price Associates in 1937 with an investment discipline focused on well-managed companies whose earnings and dividends were expected to grow faster than inflation and the overall economy. In 1950, he introduced his first mutual fund, the T. Rowe Price Growth Stock Fund. He eventually sold the company in the 1970s, but the firm retained his name, recognizing the value of its strong brand. T. Rowe Price is now one of the nation’s premier investment houses and has posted a profit every quarter since it went public in 1986. Over the course of more than seven decades, T. Rowe Price has expanded to serve individual investors, institutional investors, financial intermediaries and defined contribution plan sponsors and their employees.
“Proprietary fundamental research has enabled the firm to build one of the largest and most comprehensive buy-side research organizations in the industry. The firm manages a broad range of U.S. and international stock, blended asset, bond and money market mutual funds and other investment portfolios that are designed to meet the varied and changing needs and objectives of individual and institutional investors. Six Price funds—Growth Stock, Equity Income, Mid-Cap Growth, Blue Chip Growth, Value and Capital Appreciation—accounted for 25% of the company’s advisory revenues in 2010 and 21% of the assets under management as of December 31, 2010.
“The diversity of both product and distribution is a durable source of strength and stability for the firm. In 2010, the company continued to broaden their global investment and service capabilities by completing the acquisition of a 26% stake in UTI, India’s fourth largest asset management company, for $144 million.
Pristine Balance Sheet
“T. Rowe Price maintains a pristine balance sheet with no long-term debt and ample liquidity, including more than $1 billion of cash as of June 30, 2011. Free cash flow increased 50% during the first half of the year to $578 million, with the company’s projected capital expenditures for the full year estimated to be about $106 million. During the first half of 2011, the company used part of its cash stash to repurchase four million shares for $241 million at an average cost of $60.25 per share. In February 2011, the company increased the dividend 15% to an annual rate of $1.24 per share. The dividend currently yields an attractive 2.7%. This marked the 25th consecutive year since the company’s initial public offering that it has increased its dividend payout.
“T. Rowe Price’s operations are profitable with high profit margins translating into high returns on shareholders’ equity, which averaged more than 20% over the last five years. This is notable not only in light of the company’s conservative financial position, but also because it covers the 2008-2009 downturn in the financial markets. Despite volatile markets, the company’s strong net new client inflows across equity and fixed-income portfolios helped to boost the firm’s assets under management at the end of the second quarter to a record high of $521 billion. Second quarter net revenues and earnings also reached record new highs with revenue up 24% and net income up 29%. While the second half of 2011 may be more challenging given current market conditions, keep in mind this quote from their 2010 annual report, ‘A long-term approach demands patience and perseverance, and its value reveals itself over time.’ Long-term investors should consider investing in T. Rowe Price, a HI-quality company with a strong brand, pristine balance sheet and 25 years of profitable operations. Buy.”
Ingrid R. Hendershot, CFA, Hendershot Investments, 9/11