Recessions can be scary and have real consequences for jobs and the stock market. But they are part of life for long-term investors. Recessions can threaten weak companies that lack the fundamental strength to survive economic downturns.
How do you know a company can survive tough times? Dividends are a great litmus test. Look for companies that can share their profits with investors And keep increasing that payout during recessions. The U.S. economy has gone into recession four times since 1990.
Investment management company T. Rowe Prize (NASDAQ: TROW) has increased its dividend through all four recessions and every year for the last 38 years. Here’s the secret to T. Rowe Price’s longevity and why it could be an excellent buy for any long-term investor today.
A company built on the markets
The financial markets are the primary avenue for wealth creation in the modern world, but most people don’t have the time, desire, or education to manage all of their investments independently. Investment management firms like T. Rowe Price sell a variety of financial products, such as mutual funds, provide advisory services to clients, and manage retirement plans for employers. T. Rowe Price generates revenue primarily by charging fees on the collective $1.6 trillion in assets it manages.
T. Rowe Price’s assets under management (AUM) grow when clients invest more money in its products and services or when the assets themselves increase in value. The U.S. stock market continues to grow over the long term, and that builds growth into T. Rowe Price’s business. However, it also makes the company susceptible to market crashes as asset prices fall and fearful clients pull their funds out of the markets.
During recessions (2001, 2008, 2020) there is an occasional decline, but in the long term there is an upward trend:
Rock-solid financial institutions support generous shareholder returns
T. Rowe Price thrives on cash profits; the company has few expenses outside of its employees, which means management can be very generous to shareholders. The company has gone beyond annual dividend increases and has declared special dividends twice in the past decade. These are one-time dividends and are usually much larger than the usual payout. During that time, T. Rowe Price bought back 15% of its total shares, which helped boost the stock price by increasing earnings per share.
The key is that management can do this without sacrificing the financial health of the company. Today, T. Rowe Price has $2.7 billion in cash and zero debt. When the next recession comes, management can replace any drop in profits with the cash it already has.
Why T. Rowe Price is a Bargain 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, which charge higher fees than a passive fund that might track a market index and charge investors less. This year, total assets in passive investments exceeded active ones for the first time, which could hamper T. Rowe Price’s long-term growth.
That said, the stock appears appropriately priced for that risk. Shares are trading at a forward P/E ratio of 12 today, below the decade average of 15. Analysts believe that T. Rowe Price will still grow earnings by nearly 7% annually over the long term. Again, the stock’s valuation is fairly reasonable for that expected growth. Even if the stock’s valuation stays the same, investors could still see a total annual return of about 11%, since the dividend yield is 4.6% today.
T. Rowe Price could disappoint in terms of growth, and investors will get a high-yielding dividend stock that will likely continue to grow its payout. That’s a solid worst-case scenario. On the other hand, the stock could outperform the market if the company performs as expected. This heads-you-win-tails-you-still-win investment scenario makes the stock a bargain today.
Should You Invest $1,000 In T. Rowe Price Group Now?
Before you buy T. Rowe Price Group stock, you should consider the following:
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool recommends T. Rowe Price Group. The Motley Fool has a disclosure policy.
This 4.6% Yield Financial Stock Raised Its Dividend During The Last 4 Recessions was originally published by The Motley Fool
