Summary
- T. Rowe Price trades at a low P/E ratio and has a strong dividend growth history.
- However, that doesn't automatically make the stock a buy.
- The company's funds are performing better than most active managers, but it's still a tough battle against passive funds.
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At first glance, T. Rowe Price (TROW) might look like an attractive, cheaply-priced defensive stock for investors interested in dividend growth. The company is selling at under 14x trailing earnings, has shown solid earnings and cash flow growth over the past decade, and has a 5-year dividend growth rate of nearly 12%. Combine with an almost 3% starting yield, and there's a lot to like about TROW stock.
When you take a closer look, however, there are some issues that come up. I don't think T. Rowe Price is a bad company, and long-term holders will probably make money from today's prices. But I'd be surprised if shares crush the market in coming years.
Active Managers Face A Huge Headwind
The core problem for T. Rowe Price's business outlook going forward is the ongoing switch in clients' preferences away from active toward passive managers. I know this probably isn't a shocking insight, but you still can't overlook it in the case of TROW stock. As the company notes several times throughout its latest 10-K, this is a major ongoing concern for the company:
The market environment in recent years has led investors to increasingly favor lower fee passive investment products. As a result, investment advisors that emphasize passive products have gained and may continue to gain market share from active managers like us. While we believe there will always be demand for good active management, we cannot predict how much market share these competitors will gain.
If current or potential customers decide to move their assets to one of our competitors, we could face a significant decline in market share, assets under management, revenues, and net income. In the event that we decide to reduce the fees we charge for investment advisory services in response to competitive pressures, which we have done selectively in the past, revenues and operating margins could be adversely impacted.
The one point I'd dispute with T. Rowe is that the preference for passive investments is simply due to "the market environment". We've seen a pretty steady build in passive market share that has continued growing throughout both the lean years around 2008 and the boom years of late.
In fact, according to Bloomberg, which cites data from Morningstar, passive monies in stock ETFs and mutual funds are set to overtake active ones later on in 2019. Here's a graph from that Bloomberg article showing just how drastic passive management's rise has been in recent years:
