Summary
- TROW's 20% dividend increase extended its dividend increase streak to 35 years in an emphatic way.
- More importantly, TROW generated double-digit net revenue and adjusted diluted EPS growth in 2020 despite some COVID-19 headwinds, which supports the decision to hike the dividend in a major way.
- TROW is also trading at a 4% discount to fair value.
- Between its 2.7% yield, 7.0-8.0% annual earnings growth, and 0.4% annual valuation multiple expansion, TROW is positioned to meet my 10% annual total return requirement over the next decade.
The true mark of a quality dividend growth stock is a business that seemingly delivers just as strong operating results in a challenging operating environment than a favorable operating environment.
One such example of a stock that has delivered strong operating results despite COVID-19 headwinds to an extent is T. Rowe Price Group (TROW).
As I'll discuss below since I covered T. Rowe Price Group last December (hereafter referred to as TROW), TROW's dividend is very safe for the foreseeable future due to the fact that its dividend was just raised by 20% and its adjusted EPS and FCF payout ratios are quite sustainable, TROW generated double-digit net revenue and diluted EPS growth in 2020, and the stock is trading at a slight discount to fair value.
The Safest Dividend Is One That Has Just Been Hiked 20%
Even though TROW's 2.65% yield is within a reasonable range of the S&P 500's 1.49% yield and this alone implies that the dividend is safe for the foreseeable future, I will be examining TROW's adjusted diluted EPS and FCF payout ratios during 2020 to independently assess the safety of TROW's dividend going forward.
TROW generated $9.58 in adjusted diluted EPS during 2020 against $3.60 in dividends/share paid out during that time, for an adjusted diluted EPS payout ratio of 37.6%.
Moving to FCF, TROW reported $2.479 billion in operating cash flows during 2020 against $215 million in capital expenditures, for FCF of $2.264 billion.
When weighed against the $846 million in dividends paid out during the year, this equates to an FCF payout ratio of 37.4%.
Aside from TROW's highly sustainable adjusted diluted and FCF payout ratios in 2020, TROW's management team and Board of Directors signaled a vote of confidence in the business with a staggering 20% dividend increase earlier this month.
When I factor in that TROW's payout ratios could comfortably expand a bit over the long-term and that Yahoo Finance is forecasting 13.8% annual earnings growth over the next 5 years, I am reiterating my 7.75% annual dividend growth rate over the long-term for TROW.
