T. Rowe Price Group, Inc. (NASDAQ-GS: TROW) today reported its fourth quarter of 2016 results, including net revenues of $1.1 billion, net income of $379.8 million, and diluted earnings per common share of $1.50. The firm recognized in its fourth quarter of 2016 operating expenses an insurance recovery of $100 million before taxes, or $.24 in diluted after-tax earnings per share. The recovery was a partial offset to the $166.2 million nonrecurring operating charge related to the Dell appraisal rights matter recorded in the second quarter of 2016.
Financial Highlights
The table below presents financial results on a U.S. GAAP basis as well as a non-GAAP basis to adjust for the impact of the consolidated sponsored investment portfolios and other non-operating income. The 2016 results also reflect a non-recurring charge net of insurance recovery related to the Dell appraisal rights matter. The firm believes the non-GAAP financial measures below provide relevant and meaningful information to investors about its core operating results.
Assets Under Management
Assets under management decreased $2.1 billion in the fourth quarter of 2016, but increased $47.7 billion for the full year of 2016 to $810.8 billion at December 31, 2016. The components of the change in assets under management for the three months and year ended December 31, 2016
The firm's net cash outflows for the fourth quarter of 2016 and the full-year 2016 are largely attributable to institutional and intermediary clients reallocating to passive investments. The trend to passive also impacted the net cash flows originating in the firm's target-date retirement portfolios. These portfolios were the source of net cash outflows of $1.9 billion in the fourth quarter of 2016, and net cash inflows of $6.3 billion for the year ended December 31, 2016.
Investors domiciled outside the United States accounted for about 5% of the firm's assets under management at December 31, 2015 and 2016.
Capital Management
T. Rowe Price remains debt-free with ample liquidity, including cash and discretionary sponsored portfolio investment holdings of $1.9 billion at December 31, 2016. We also have redeemable seed capital investments in sponsored investment portfolios of $1.3 billion at December 31, 2016. The firm's common shares outstanding decreased since the end of 2015 as the firm expended $676.9 million in 2016 to repurchase 10.0 million shares, or 4.0% of its outstanding common shares, including $130.0 million to repurchase 2.0 million shares during the fourth quarter of 2016. The firm invested $148.3 million during the full year of 2016 in capitalized technology and facilities. The firm expects capital expenditures for 2017 to be up to $175 million, of which about two-thirds is planned for technology initiatives. The firm's expenditures are expected to continue to be funded from operating resources.
Investment Performance
For the three-year period ended December 31, 2016, 84% of the T. Rowe Price mutual funds across their share classes outperformed their comparable Lipper averages on a total return basis, 80% outperformed for the five-year period, 86% outperformed for the 10-year period, and 53% outperformed for the one-year period. In addition, 86% of our rated Price Funds' assets under management ended the year with an overall rating of four or five stars from Morningstar. The firm's target-date retirement funds continue to deliver excellent relative long-term performance, with at least 96% of these funds outperforming their comparable Lipper averages on a total return basis for the three-, five-, and 10-year periods ended December 31, 2016. The performance of the firm's institutional strategies against their benchmarks weakened in 2016, but remains very competitive over longer time periods.
Financial Results
Investment advisory revenues earned in the fourth quarter of 2016 from the T. Rowe Price mutual funds distributed in the U.S. were $700.7 million, an increase of $32.5 million, or 4.9%, from the comparable 2015 quarter. Average mutual fund assets under management in the fourth quarter of 2016 increased 4.8% from the average in the fourth quarter of 2015 to $512.8 billion. Money market advisory fees voluntarily waived by the firm to maintain positive yields for investors in the fourth quarter of 2016 were $1.1 million, compared with $9.8 million in the 2015 quarter. The firm expects money market fee waivers, if any, will be insignificant in 2017.
Investment advisory revenues earned in the fourth quarter of 2016 from other investment portfolios were $266.1 million, an increase of $8.3 million, or 3.2%, from the comparable 2015 quarter. Average assets under management in the fourth quarter of 2016 were $294.8 billion, an increase of 6.7% from the average in the fourth quarter of 2015.
Operating expenses, excluding the $100.0 million insurance recovery related to the Dell appraisal rights matter, were $627.9 million in the fourth quarter of 2016, an increase of $30.7 million from the comparable 2015 quarter. Based on planned initiatives, the firm currently expects that its planned operating expenses, excluding the net charge related to the Dell appraisal rights matter, will grow in the high single-digit range in 2017 versus 2016. The firm could elect to moderate the pace of spending on its planned initiatives should markets decline significantly. In addition, other events not currently planned or expected could impact the firm's expense levels.
Compensation and related costs increased $24.8 million from the fourth quarter of 2015, due primarily to additional headcount, increases in bonus and stock based compensation, and higher benefits. Average staff size increased by 5.6% from the fourth quarter of 2015, and the firm employed 6,329 associates at December 31, 2016.
Advertising and promotion costs were $27.2 million in the fourth quarter of 2016, compared with $27.0 million in the comparable 2015 period. The firm currently expects advertising and promotion costs for 2017 to be up to 10% higher than the 2016 year as the firm executes on a number of strategic initiatives.
Occupancy and facility costs, together with depreciation expense were $78.7 million in the fourth quarter of 2016, an increase of $6.1 million, or 8.4%, compared to the fourth quarter of 2015. The increase is primarily attributable to the added costs to update and enhance technology capabilities, including related maintenance programs, and to renovate existing facilities.
As compared to the prior year, the firm consolidates a larger number of sponsored investment portfolios in which it is deemed to have a controlling interest. The consolidation of these portfolios results in the recognition of each portfolio's investment income and operating expenses in the firm's consolidated statement of income, including the portion attributable to unrelated third party investors. The portion attributable to third party investors is removed from the firm's net income to arrive at net income attributable to T. Rowe Price Group, which is used in the calculation of earnings per share. A table detailing the impact on the firm's consolidated statement of income is included in the tables at the end of this earnings release.
The firm's effective tax rate for the fourth quarter of 2016 was 36.3%, which contributed to the 36.0% effective tax rate for 2016. The firm currently estimates its effective tax rate for 2017 will be about 36.5%. The firm's 2017 estimate assumes the tax benefits earned from stock-based compensation will be similar to those earned in 2016.
Management Commentary
William J. Stromberg, the company's president and chief executive officer, commented: "U.S. stocks advanced sharply in the fourth quarter of 2016, lifting major indexes to record highs and resulting in strong full-year gains for many investors. Economic growth finished 2016 on a strong note and investors grew more optimistic that the incoming administration and Congress will succeed in reducing regulations and taxes. International equity markets delivered positive but less strong results, held back by a strengthening U.S. dollar. Fixed income returns suffered in the quarter as interest rates rose following the U.S. elections. Full year returns, though, were solid, led by high yield and emerging market bonds.
"We experienced net cash outflows for the fourth quarter and the year, largely as a result of clients reallocating from active U.S. equity strategies to passive products. The trend to passive has been persistent and has accelerated in recent years. We cannot predict when it will reach a new equilibrium. Over the long term though, we expect well-executed active management to play an important ongoing role for investors and we are reinvesting in our company with the objective of sustaining the strong investment and service results we have historically achieved for our clients.
"Our previously announced initiatives in product, distribution, and technology are moving ahead as planned. We are expanding our asset allocation business to meet the growing demands of global solution-seeking investors. We are continuing the buildout of our distribution capabilities to capitalize on opportunities in key markets outside of the U.S., as well as with intermediaries in the U.S., where regulatory changes are creating opportunities. And we are investing to enhance our clients' technology-enabled experiences across all of our businesses. For example, our new T. Rowe Price ActivePlus Portfolios discretionary advice service was beta tested this past quarter and is formally launching to clients in early 2017.
"As we invest to strengthen our company for the long term, we have continued to return cash to stockholders in the near term paying $541 million of dividends and investing $677 million to repurchase 4% of our shares in 2016. Over the past three years, we have returned a total of $4.1 billion to stockholders in dividends and share repurchases, more than 110% of our net earnings over this period of time.
"This is a time of significant change in the asset management industry and we are responding by investing to strengthen our long-term value proposition to our clients and to our stockholders. We believe that delivering excellent long-term net investment performance to our clients with outstanding service and support will lead to attractive stockholder returns over time."
Other Matters
The financial results presented in this release are unaudited. KPMG LLP is currently completing its audits of the firm's 2016 consolidated financial statements and internal controls over financial reporting at December 31, 2016. The firm expects that KPMG will complete its work in early February and that it will then file its Form
10-K Annual Report for 2016 with the U.S. Securities and Exchange Commission. The Form 10-K will include additional information, including the firm's audited consolidated financial statements, management's report on internal controls over financial reporting at December 31, 2016, and the reports of KPMG.
Certain statements in this earnings release may represent "forward-looking information," including information relating to anticipated changes in revenues, net income and earnings per common share, anticipated changes in the amount and composition of assets under management, anticipated expense levels, estimated tax rates, and expectations regarding financial results, future transactions, new products and services, investments, capital expenditures, dividends, stock repurchases, and other market conditions. For a discussion concerning risks and other factors that could affect future results, see the firm's 2015 Form 10-K.
Founded in 1937, Baltimore-based T. Rowe Price (troweprice.com) is a global investment management organization that provides a broad array of mutual funds, subadvisory services, and separate account management for individual and institutional investors, retirement plans, and financial intermediaries. The organization also offers a variety of sophisticated investment planning and guidance tools. T. Rowe Price's disciplined, risk-aware investment approach focuses on diversification, style consistency, and fundamental research.
