The company has cash, no debt, and has raised its dividend for nearly four decades.
Recessions can be scary and have real consequences for businesses and the stock market. However, they are part of life as a long-term investor. A recession can threaten weak companies that lack the basic strength to survive an economic downturn.
How do you know if a business can survive tough times? Dividends are a great litmus test. Look for companies that can share their earnings with investors and Continue to increase this payment through the recession. The US economy has been in recession four times since 1990.
Investment management company t ro price (TROW -1.24%) It has increased its dividend in all four recessions, as well as every year for the past 38 years. Here’s the secret to T. Rowe Price’s longevity and why it’s a great buy for any long-term investor today.
A business built on markets
Financial markets are the main way to create wealth in the modern world, but most people don’t have the time, inclination or education to manage all their investments independently. Investment management firms such as T. Rowe Price sell various financial products such as mutual funds, provide advisory services to clients, and administer retirement plans for employers. T.R. Price primarily generates revenue by charging fees on the $1.6 trillion in assets it manages.
T-Ro Price’s assets under management (AUM) grow when clients invest more money in its products and services or when the assets themselves appreciate. The U.S. stock market continues to rise over the long term, which is driving growth in T. Rowe Price’s business. However, it makes the company susceptible to market crashes as asset prices fall and frightened customers may pull their funds out of the market.
You can see occasional dips during recessions (2001, 2008, 2020), but the long-term trend shows:
TROW (TTM) revenue data by YCharts
Iron Money supports generous shareholder returns
T. Roe price flows cash profit. The company has few expenses besides its employees, which means that management can be very generous to shareholders. The company has exceeded annual dividend increases and paid special dividends twice in the past decade. These are one-time benefits and usually much larger amounts than the regular payout. During this period, T-Ro Price repurchased 15% of its total shares, which helped boost the stock price by increasing earnings per share.
TROW dividend data by YCharts
Most importantly, management can do this without jeopardizing the company’s financial health. Today, T-Ro Price has $2.7 billion in cash and zero debt. When the next recession hits, management can supplement any reduction in profits with the cash it already has.
Why T. Rowe Price is a Buy Today
One risk T. Rowe Price faces is that investors have increasingly turned to passive mutual funds over the past decade. T. Rowe Price specializes in actively managed funds that charge higher fees than passive funds that may follow a market index and charge investors less. This year, the total assets of passive investments surpassed active ones for the first time, which could stunt T. Rowe Price’s long-term growth.
That said, the stock seems well-priced for that risk. The stock trades today at a forward P/E ratio of 12, below its decade average of 15. Analysts believe that T. Rowe Price will continue to grow approximately 7% annually over the long term. Again, the stock is very reasonably priced for that expected growth. Even if the stock remains flat, investors could still see a total annualized return of around 11% as the dividend yield is 4.6% today.
T. Rowe Price may be short on growth, and investors are getting a high dividend yield that will likely continue to increase its payout. This is a solid worst case scenario. On the other hand, if the business performs as expected, the stock can outperform the market. This head investing scenario, you win, you keep winning, buy stocks today.
Justin Pope has no position in any of the listed stocks. The Motley Fool recommends T. Rowe Price Group. The Motley Fool has a disclosure policy.