Asset management giant T. Rowe Price Group (NASDAQ: TROW) demonstrated its quality in the second quarter by beating analysts’ earnings and earnings per share forecasts.
But does that mean it’s a stock to consider for your portfolio?
Let’s take a look at how T. Rowe Price was able to beat analysts’ forecasts in his last earnings report, if it can continue going forward and if the company is currently a buy.
Higher investment advisory fees and disciplined cost management
T. Rowe Price reported second quarter revenue of $ 1.93 billion, a growth rate of 36.3% from the $ 1.42 billion generated during the period of last year. The total was slightly higher than analysts’ estimate of $ 1.88 billion.
Most of T. Rowe Price’s revenue growth was the result of a slight increase in investment advisory revenue, which represented 93% of T. Rowe Price’s net revenue for the quarter. T. Rowe Price’s investment advisory fee largely depends on the total value and mix of assets under management, or AUM, according to the company’s recent 10-K file. They also tend to dictate the operating results of the business.
T. Rowe Price’s average assets under management grew 39% year-on-year to $ 1.59 trillion, as the broader market rallied from a year ago in the middle of the year. investor optimism. This strong growth led to a 38.1% year-over-year increase in investment advisory fees, which totaled $ 1.79 billion in the second quarter.
As one of the world’s largest asset managers, T. Rowe Price benefits tremendously from its size and scope. As the revenue base of the business grows, its operating expenses usually don’t increase as quickly. The company’s operating expenses increased 12.7% year-over-year to $ 971 million in the second quarter of 2021, but the rise fell short of the revenue gains that were created.
Another market rise is a tailwind
T. Rowe Price was able to generate adjusted diluted EPS of $ 3.31 in the second quarter of 2021 ($ 0.15 more than analysts’ estimate of $ 3.16) versus $ 2.29 reported in second quarter of 2020. This represents a whopping 44.5% year-over-year growth rate.
This Q2 performance is positive, but can the operational fundamentals of the company remain strong going forward?
A JP Morgan last month’s analyst report raised the year-end target for the S&P 500 Index from 4,400 to 4,600, citing improving labor market fundamentals and record household savings. This price target implies a 4% increase over the index where the index traded on August 10. This additional market growth is expected to help increase T. Rowe Price’s assets under management and investment advisory fees over the next two quarters to close this year.
No long-term debt and abundant liquidity
In a low interest rate environment that has tempted many companies to borrow tons of cheap capital for share buybacks and investments to create future growth, T. Rowe Price has refrained entirely from generate new debt.
T. Rowe Price had no long-term debt in the second quarter. More encouragingly, the company was able to increase its cash balance from $ 2.8 billion in the first quarter of 2021 to $ 3.5 billion in the second quarter of 2021. With a market cap of $ 48 billion, that means that the company is based on cash of 7% of its market capitalization.
This fortress-like track record allowed T. Rowe Price to increase his quarterly dividend by 20% earlier this year and pay a special dividend of $ 3 per share in June.
Given T. Rowe Price’s stable operating fundamentals and its commitment to return capital to its shareholders, it is likely that the company’s generous shareholder policies will continue.
A quality dividend stock that deserves your attention
The macroeconomic conditions and T. Rowe Price’s second quarter operating results suggest that the company’s strong fundamentals should continue. T. Rowe Price’s lack of long-term debt and the abundance of cash on its balance sheet should translate into good returns of capital for shareholders going forward.
The company’s secure 2% dividend yield provides income investors with immediate income well above the 1.3% average yield of the S&P 500 while also playing into the broader economic recovery underway.
T. Rowe Price’s 12-month price-to-earnings ratio of 17.2 is just above its 13-year median of 17, which is a reasonable price given that the company’s earnings growth potential remains. as strong as he has been lately. years. Even though T. Rowe Price experienced a rally in its share price over the past week following its earnings report, the stock is still trading around its fair value, making it a solid buy for investors. in dividends.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.