Why you should consider this top dividend paying stock for your portfolio
AAs dividend investors can attest, choosing the right stocks for your diversified portfolio is important to ensure long-term success. What characteristics do strong dividend stocks typically have? The best are consistently increasing their earnings and earnings per share (EPS), have strong balance sheets, and maintain low payout ratios.
I believe the asset manager T. Rowe Price Group (NASDAQ: TROW) tick all of these boxes. But is the stock a buy right now? Let’s dig in and see if we can find an answer.
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T. Rowe Price Group Reports Impressive Third Quarter
The company narrowly missed third quarter analyst revenues and non-GAAP (adjusted) EPS estimates. And while it may seem daunting, it’s important to put these results in the right context.
T. Rowe Price has met or exceeded analysts’ expectations for revenue and Adjusted EPS in the 10 consecutive quarters leading up to the third quarter. This suggests that the company has fallen victim to its own success. It is likely that analysts have slightly overestimated what its financial results would be for the third quarter.
T. Rowe Price reported third quarter net sales of $ 1.95 billion, up 22.5% from a year ago. So, despite a 1% drop in revenues of $ 1.97 billion forecast by analysts, the company continues to grow very rapidly. How did he manage to do this?
Thanks to the continued appreciation in the stock markets over the past year, the company’s average assets under management grew 27.5% year-over-year to $ 1.65 trillion in the third trimester. It continued to generate the vast majority of its income from investment advisory fees (92.8% of third quarter net income) assessed on the basis of assets under management, which explains the increase in net income over the period. trimester.
And while revenue was much higher in the third quarter, its adjusted operating expenses only increased 15.3% year-over-year to $ 957 million in the quarter. This is what led T. Rowe Price’s adjusted net margin to rise 150 basis points to 39.3% in the quarter. The company’s combination of a higher revenue base and higher net margins resulted in an increase in adjusted EPS of 28.2% year-over-year to $ 3.27 in the third quarter.
Since S&P 500 Established its 66th all-time high of 2021 last week, T. Rowe Price is a prime candidate to benefit from such a strong stock market. Against this record backdrop, it makes sense that analysts expect the company to post 16% annual profit growth over the next five years.
Debt free with lots of cash
A testament to the discipline of T. Rowe Price’s management team, the company has a fortress-like track record. The absence of long-term debt is of particular interest as Federal Reserve Chairman of St. Louis, James Bullard, is planning two rate hikes next year. Since the company has no debt, it does not have to worry about the magnitude of the interest rate hike.
With a balance of $ 5.34 billion in cash and discretionary investments at the end of the third quarter, the company has enough cash to be able to redeem 11.5% if it chooses to do so. This is based on T. Rowe Price’s market cap of $ 46.4 billion at the current share price of $ 207.
Simply put, it has a lot more flexibility than most companies to reward its shareholders with dividend increases, share buybacks, and special dividends.
A growth share with an updated dividend
While T. Rowe Price is a fundamentally healthy company, it seems the market isn’t fully appreciating the stock.
It trades at a forward price-to-earnings ratio of 15.4, which is well below the asset management industry average of 17.7. T. Rowe Price not only has a clear advantage over most asset managers with a debt-free balance sheet, but his growth prospects are also very promising. The company’s potential for annual profit growth of 16% over the next five years ranks it in the top 10% of 202 asset managers.
And while investors wait for the company to rightfully score a higher valuation, they may receive a well-hedged 2.1% dividend yield that is better than the market. Overall, this is why I still think T. Rowe Price Group is a top notch stock worth buying.
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Kody Kester owns shares of T. Rowe Price Group. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.