Category: Expert Insights

with two thirds of its assets under management derived from retirement-based accounts. At the end of 2020, 83%, 79%, and 77% of the company’s fund AUM were beating peers on a 3-, 5-, and 10-year basis, respectively, with 77% of AUM in the funds closing out the year with an overall rating of 4 or 5 stars, better than just about every other U.S.-based asset manager. T. Rowe Price also has a much stronger Morningstar Success Ratio—which evaluates whether a firm’s open-end funds deliver sustainable, peer-beating returns over longer periods–giving it an additional leg up.

T. Rowe Price is uniquely positioned among the firms we cover (as well as the broader universe of active asset managers) to pick up business in the retail-advised channel, given the solid long-term performance of its funds and reasonableness of its fees, exemplified by deals the past few years with Fidelity Investments’ Funds Network and Schwab’s Mutual Fund OneSource platform. With the company likely to generate mid- to high-single-digit AUM growth on average going forward (aided by 0%-3% annual organic growth), we see top-line growth expanding at a positive 7.7% CAGR during 2021-25, with operating margins of 47%-49% on average.

Financial Strength

T. Rowe Price has traditionally maintained a very conservative balance sheet, with no debt on its books since 2002. The company has relied overwhelmingly on its internally generated capital to fund acquisitions and other investments, while still returning a sizable amount of capital to shareholders via stock repurchases and dividends. During 2011-20, T. Rowe Price, by our calculations, generated $14.9 billion in free cash flow (cash flow from operations less capital expenditures) and returned $5.3 billion to shareholders as share repurchases (net of issuances) and $6.2 billion as dividends. Our current forecast has the firm generating $3.5 billion in free cash flow annually on average during 2021-25, the bulk of which will be dedicated to seed capital investments, acquisitions, dividends, and share repurchases.

The company’s quarterly dividend was raised 20% in February 2021 to $1.08 per share, and the company has announced a $3.00 per share special dividend, which was paid out in July 2021. The company remains comfortable with the 35%-40% payout ratio we’ve seen for the regular quarterly dividend over the past five years. During 2019, T. Rowe Price bought back 7.0 million shares (equivalent to 2.9% of its outstanding shares) for just over $700 million, offset by $83 million worth of stock issued under stock-based compensation plans. The firm followed this up with the repurchase of 10.9 million shares for $1.2 billion (equivalent to 4.6% of outstanding shares) during 2020, offset by some $200 million worth of stock-based compensation plan issuances. During the first half of 2021, T. Rowe Price bought back 1.9 million shares for around $309 million.

Bulls Say’s

• With $1.623 trillion in AUM at the end of June 2021, T. Rowe Price is one of the larger U.S.-based asset managers. Retirement accounts and variable-annuity investment portfolios account for two thirds of assets.
• At the end of the second quarter of 2021, 91%, 84%, and 86% of T. Rowe Price’s multi-asset AUM was beating passive peers on a 3-, 5-, and 10-year basis, respectively.
• Target-date retirement portfolios have been a significant source of organic growth, generating just under $100 billion in net inflows (equivalent to an 8% rate of annual growth) for the firm the past 10 years.

Company Profile

T. Rowe Price provides asset-management services for individual and institutional investors. It offers a broad range of no-load U.S. and international stock, hybrid, bond, and money market funds. At the end of June 2021, the firm had $1.623 trillion in managed assets, composed of equity (61%), balanced (28%), and fixed-income (11%) offerings. Approximately two thirds of the company’s managed assets are held in retirement-based accounts, which provides T. Rowe Price with a somewhat stickier client base than most of its peers. The firm also manages private accounts, provides retirement planning advice, and offers discount brokerage and trust services. The company is primarily a U.S.-based asset manager, deriving just 9% of its AUM from overseas.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.