Founded in 1937 with Robert Sharps as its current President and CEO, [lec-stock-link]TROW[/lec-stock-link] is an investment management firm that handles other people’s money originating from 50 different countries.
In December 2021, T. Rowe stated they have $1.69 trillion of assets under management, of which clients redeemed $23.8 billion from their accounts in fiscal year 2021. One month later, the firm stated the assets under management fell to $1.58 trillion; a decrease of over 6.5%. Two years earlier in November 2019, the firm announced it will move six of its funds into a separate advisory venture in the second quarter of 2022; at the time, the to-be-spun-off funds represented about 12.8% of the firm’s total assets under management. As the firm generates it revenue from taking a percentage of these assets under management, their reduction directly equates to a decrease in the firm’s revenue. Additionally, the Federal Reserve is poised to raise interest rates, which is not good in the short-term for growth strategists like T. Rowe Price. It’s no wonder analysts keep downgrading the stock.
Since reaching an all-time of $224.56 on August 30, 2021, share price has been falling. At its all-time high, the company paid a $1.08 quarterly dividend. During the period of this dividend, the market demanded a yield between 1.92% and 3.01%; a $3 special dividend was also paid during this time. Over a three, five, and ten year term, investors have historically demanded an average yield of 2.6%, 2.63%, and 2.53%, respectfully, with yields ranging anywhere between 1.8% and 4.36% since 2012. Over these same periods, the company has raised its dividend an average of 16.51%, 16.18%, and 13.60%, respectfully.
On February 8, 2022, the company announced an 11.1% increase in its quarterly dividend to $1.20. If the historical dividend yields were manifested while paying this dividend, price would range from $110 to $267 with an average between $183 and $190. In its December 2021 quarterly report, the company stated it had (on a per share basis) annualized earnings of $13.70, an annualized operational cash flow of $22.72, and total shareholder equity of over $36. With the revenue generated by the company being greater than the current annualized dividend, it stands to reason the current dividend can be paid with cash left over for reinvestment. In the event operations were to immediately cease with the company being liquidated, there are enough assets to pay the dividend at its current rate for over 7.5-years.
During its decline off its all-time high, the stock price rallied a few times; one as much as 18.6%. On February 24, 2022, price hit a low of $134.20 (a 3.58% yield). If the dividend grew by its average 10-year rate of 13.60% to $5.45 next year and the historical dividend yields were observed, price would be expected to range from $125 to $303 with an average between $207 and $215. It is not out of the realm of possibility for price to reach $275, making recent market observations of $137.50 an appealing price at which to open a position.
With analysts continuing to downgrade the stock, it might be a better strategy to buy call options to open. Today at 1:30pm EST, the stock was trading for $138.72 with call options having a strike of $140 and expiring on December 16, 2022, asking $15.30 to open. For each of these contracts purchased, one would have the option (but not the obligation) to purchase 100 shares at $140 any time in the next 8 months. In the event price continued its downward trend, shares could be bought on the open market at the lower price; the option contract could also be sold off or let to expire. In any case, the most one could loose is $1,530 per contract. And in the event price rose, the holder of such a contract could exercise it to obtain shares to sell at this higher price, or simply sell off the contract (which would have increased in value).