The 8.6% year-over-year inflation rate posted last month was a 40-year high. This will likely require the Federal Reserve to hike interest rates several more times this year and into next year.
In this environment, investors would be well suited to consider companies that are loaded with cash and have no long-term debt. With a nearly $2.6 billion cash and investments balance and no long-term debt, interest rate hikes won’t hurt the asset manager T. Rowe Price Group (TROW 3.01%). Here’s why the stock looks like it could be a buy for long-term investors.
Near-term headwinds are overshadowing the company’s long-term tailwinds
Fears of a looming recession have pushed the S&P 500 index 21% lower so far this year. The market downturn has caused T. Rowe Price’s assets under management (AUM) to fall 11.9% year over year to $1.4 trillion as of May.
Adjusted net revenue and non-GAAP (generally accepted accounting principles) diluted earnings per share (EPS) are expected to drop 5.7% and 19.6% year over year in 2022. This is because the vast majority of T. Rowe Price’s net revenue is derived from investment advisory fees, which are tied to the size of the company’s AUM.
The company’s investment products have proven to be among the best in its industry. This is supported by the fact that 79% of its sponsored mutual funds have outperformed peers over a 10-year period. And 74% of T. Rowe Price’s composites have outperformed their benchmarks over that time. That explains how the company has been able to generate 11% annual net revenue growth and 16% annual earnings growth in the past 10 years.
Even considering the headwinds this year, analysts expect that T. Rowe Price’s outstanding reputation and gradually increasing equities will lead to 12.6% annual earnings growth through the next five years.
A massive, sustainable dividend
The challenges that T. Rowe Price will face over the next several quarters have allowed the dividend yield to swell to a market-trouncing 4.5%. This is nearly triple the S&P 500 index’s 1.7% yield. And it looks like this huge dividend isn’t too good to be true.
That’s because T. Rowe Price’s dividend payout ratio is projected to be 46.8% in 2022. This payout ratio leaves the asset manager with enough capital to execute acquisitions and repurchase shares to power adjusted diluted EPS higher moving forward.
T. Rowe Price’s manageable payout ratio should translate into dividend growth in line with earnings growth for the foreseeable future. A market-smashing dividend with above-average growth potential is hard to beat, which is what makes the stock a compelling Dividend Aristocrat to buy on sale.
A dip to consider buying
T. Rowe Price’s stock has plummeted 44% year to date. This is why the stock is trading at a forward price-to-earnings ratio of about 10, which is slightly lower than the S&P 500 asset management industry average of 11.4. And T. Rowe Price’s price-to-sales ratio of 3.3 is well below its 10-year median of 5.4.
The only caveat that I would provide is that the stock could dip a bit further if the economy does enter a recession. But for a stock with largely intact fundamentals, T. Rowe Price looks to be a great buy for investors with a long-term mindset.