I love how most stock brokerages have moved to zero commissions. This allows investors to dollar cost average in on a daily basis if needed. When I was in high school it cost $10 to buy and sell on TD Ameritrade. So, from a practical standpoint, I felt obligated to invest $500 or more. I wanted to feel like I was getting value for my trades. Nowadays, most brokers are commission free and earn their revenues instead from order flows and other services. I recently began acquiring shares of T. Rowe Price (TROW) in January. And I’ve been buying a share here and there, improving my cost basis as share prices have fallen. Had this been 2009, I’d be down far more on this position. Averaging in going forward will further improve my cost basis and add more shares at a juicy 4%+ dividend yield.
For those who are unfamiliar with TROW, the company is a global investment management firm. The firm was founded by Thomas Rowe Price, the father of growth stock investing. TROW is focused on active management investing rather than passive. For instance, buying Vanguard’s VOO would be passive as it carries a lower expense ratio and tracks an index. Like others in its class, TROW earns its revenue by charging fees on their assets under management. This is precisely why the stock is falling. As the stock market falls, assets under management also falls. Furthermore, investors get spooked in down markets, leading to capital outflow. This further exacerbates the issues asset managers face in down markets.
In this case I believe the valuation more than makes up for the risk. Investors get overly pessimistic in times like these, leading great companies like TROW to get unfairly punished. The company is down almost 50% from its record high set in 2021. TROW has a dividend yield of 4.24%, a payout ratio of 36%, a P/E of 9, triple the revenue it had 10 years ago, and almost no debt. Yes, you read that right! No long-term debt with $4.5 billion in cash and investments. Therefore, while it is widely expected for earnings to decline in the short-run, the future looks bright. If you have no debt, then it is pretty hard to go bankrupt. With very little capital expenditures, the company has the ability to pay most of its free cash flow back to shareholders.
As mentioned, TROW is an active manager. There has been a stigma developing over such businesses. Active asset managers typically underperform the market. This could be a long-term headwind in addition to falling asset prices. However, the low valuation, strong financials, and high dividend yield help offset this risk. Secular trends like rising global wealth and a growing middle class are boons to asset managers. TROW could be a powerful value stock with significant price appreciation over the next 5 years. Provided the investor can stomach the volatility! I’m currently down 30% on TROW, but plan on adding additional shares. Buying more often should help smooth over risk and provide higher current income in the portfolio. Either way it will be very interesting to see how this plays out! Value stocks are on sale for a reason. They can be scary but could offer above average returns!
I am long on TROW. I am not a licensed investment adviser or tax professional. I am not liable for any losses incurred by any parties. This blog should be viewed for entertainment and/or educational purposes only. Any transactions published are not recommendations to buy or sell any securities. Please consult with an investment professional before making investment decisions.