We maintain our Neutral recommendation on T. Rowe Price Group Inc. (TROW) based on the steady profit trend of the company in the first quarter of 2011.
In April, T. Rowe Price reported first-quarter 2011 earnings of 72 cents per share, below the Zacks Consensus Estimate of 75 cents owing to higher operating expenses. However, results were significantly up from 57 cents reported in the prior-year quarter driven by higher-than-expected top-line growth and higher assets under management (AUM).
T. Rowe Price remains debt free with substantial liquidity including cash and mutual fund investment holdings. The company’s sizeable internal equity and fixed income investment research capabilities have helped it to strengthen its capital leverage and generate substantially higher return on earnings than the industry average.
These growth drivers also pave the way for an industry-leading dividend yield, thereby creating ample investor confidence and scope for investment and growth opportunities in the future.
In February 2011, T. Rowe Price’s board of directors approved a 15.0% hike in the company’s quarterly common stock dividend. The revised quarterly dividend now stands at 31 cents per share. This marks T. Rowe’s 25th consecutive year of dividend increase, reflecting the company’s commitment toward returning value to shareholders with its strong cash generation capabilities.
Equity markets around the world ended the first quarter of 2011 with gains despite experiencing volatility along the way. The positive momentum of late 2010 continued into 2011 as improving economic conditions and strong corporate earnings advanced markets steadily through mid-February.
Political turmoil in North Africa and the Middle East followed by the destructive earthquake and nuclear crisis in Japan provoked a market sell-off as investors looked to reduce risk. However, indexes rebounded strongly, in the quarter’s closing weeks.
Despite the ongoing volatility in the economic environment, T. Rowe Price continues to outpace its peers in AUM growth through its disciplined and risk-aware investment approach. The company’s AUM climbed 5.8% over the previous quarter to $509.9 billion in the first quarter of 2011.
The company’s lower fund cost structure, distribution methods and fund shareholder and administrative services helped to promote stability in mutual fund AUM throughout the market cycles.
On the flip side, the financial services industry is already heavily regulated and could be adversely affected by new laws or amendments in any of the jurisdictions in which T. Rowe Price operates.
Recently, governments in the U.S. and abroad have intervened on an unprecedented scale, responding to the stresses experienced in the global financial markets. Any kind of stringent regulation could weigh heavily on the company’s financials in the future.
Furthermore, the company incurs significant expenditure to attract investment advisory clients and additional investments from its existing clients. These efforts often involve costs that precede any future revenues recognized from an AUM increase.
Based on its current strategic projects and plans, T. Rowe Price has estimated 2011 capital expenditures to be nearly $110 million owing to property and equipment additions. These cash expenditures are expected to be funded by internal resources.
T. Rowe Price’s financial stability has the potential to take advantage of the improving economy and benefit from the growth opportunities in the domestic and global AUM. However, higher operating expenses and stringent regulatory norms could be causes of concerns.
T. Rowe Price currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. However, the company’s closest competitor, BlackRock Inc. (BLK), retains a Zacks #2 Rank (a short-term Buy rating).
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