T. Rowe Price is steady in turbulent times

The company's fundamentals remain strong with no debt, a higher return on earnings and improving investor sentiment.

By Zacks.com Mar 27, 2012 6:15PM

By: Zacks Equity Research


We maintain our "neutral" recommendation on T. Rowe Price Group (TROW) based on the company's steady profit trend. Moreover, the company's fourth-quarter earnings surpassed the Zacks consensus estimate, outshining earnings from a year earlier.

Although the global financial crisis has led to a decline in growth metrics, the company has been able to sustain positive earnings throughout the critical period. This positive operating leverage was helped by strong brand, consistent investment track record and strong business volumes.

T. Rowe Price remains debt-free with substantial liquidity, including cash and mutual-fund holdings. This has helped strengthen the company's capital leverage and generate a return on earnings that is significantly higher than the industry average. These growth drivers also paved the way for an industry-leading dividend yield, thereby creating investor confidence and scope for investment as well as growth prospects in future.

In February, T. Rowe Price’s board approved a 10% hike in the company's quarterly common stock dividend. The revised quarterly dividend now stands at 34 cents per share. This marks T. Rowe's 26th consecutive year of dividend increases, reflecting the company’s commitment toward returning value to the shareholders with its strong cash generation capabilities.

Moreover, in the current unsettled environment, the company experienced an improvement in assets under management (AUM) in 2011, including $14.1 billion in net cash inflows. However, among the company’s peers, BlackRock (BLK) reported a decline in AUM of $3.51 trillion as of Dec. 31, 2011, down 1% year over year.

On the flip side, despite experiencing wide trading ranges over the course of the year, the U.S. equity market’s 2011-end remained virtually unchanged from the 2010 level. During 2011, global markets were unusually volatile as economic and geopolitical concerns weighed heavily on investor confidence at times.

Among others include the slow economic recoveries in many developed countries, the European debt crisis and inflation in emerging markets. Moreover, lingering strong economic and global headwinds could continue to weigh on investors in the near term.

T. Rowe Price's fundamentals remain strong with a debt-free position, higher return on earnings and improving investor sentiment. Besides, relative mutual fund performance remained positive. The company has the potential to take advantage from the growth opportunities in the domestic and global AUM. Yet, competitive pressure amid economic headwinds remains the main cause of concern.

T. Rowe Price currently retains a Zacks No. 2 rank, which translates into a short-term "buy" rating.

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