Recent Buy: June 17th, 2015

We’re hearing a lot of stock market news about interest rate hikes, the Greek debt crisis, and oil prices.  Some investors are saving cash, hoping for a correction or crash to buy stocks at discounted prices, but not all stocks have the same fundamentals or valuations and I believe there are still attractive investments out there. I’ve had a busy June so far contributing $6,653.22 where I see the best long-term values.

It’s true that any number of events could cause short term pain in the stock market, but once I own a company as a dividend growth investor, I don’t really watch the stock price; I only make sure the dividend payout increases each year through the ups and downs of market volatility.  Downward stock price momentum is an opportunity to grab even more future dividends in high quality companies for less cost.  I absolutely welcome, and even hope for, a crash or correction to keep me even busier adding wonderful businesses to my portfolio.

How overvalued is the current market?  It really depends on what metrics you’re looking at, but one of the most common methods is the P/E ratio because stock prices tend to follow earnings over long periods of time.  The stock market grows as its businesses and the economy grows.  The market is always supposed to be setting new highs, so there’s no need to fear it.  I’m invested in a lot of companies that make up the S&P 500 index, and when I look at a fast graph of the index, I see a slight overvaluation compared to earnings.  We’re still below the normal P/E of the last 20 years with modest growth ahead.  (For those unfamiliar with Fast Graphs, when the black current price line moves into the dark green earnings area it indicates the business is undervalued.  Here is a basic demo on how to read fast graphs):

2015_JUNE_FG_SPXMy latest investment adds another asset manager in the financial sector to compliment my large position in Franklin Resources (BEN).  On June 17th, I initiated a position in T. Rowe Price Group (TROW).  This is a new holding for my portfolio, and I’m now invested in 26 different businesses.  I bought 17 shares for $78.82 each with a $6.95 commission for a total transaction of $1,346.89.  The 2.64% yield on my purchase adds $35.36 to my 12-month forward dividends for a new total of $2,114.05.  My objectives with this investment are faster than normal income growth and a fair amount of capital appreciation to go along with it.

I continue to be slightly over allocated to the financial sector with it accounting for over 23% of my overall portfolio; financials are the second largest sector in the S&P 500 index behind technology.  Since I plan to limit technology to under 10% of my portfolio because of it’s unpredictable future, my higher weighting of financials reflects the large array of investment opportunities available there.  Here’s what the sector breakdown of the S&P 500 index looked like at the end of May:

2015_JUNE_indexallocationHere’s what my portfolio’s updated sector allocation looks like:

2015_JUNE_mysectorweightAsset managers alone now make up almost 10% of my portfolio which is higher than I’d like; however, I’m just starting my investment accumulation phase and every new purchase brings that percentage down a good bit.  Meanwhile, I feel comforted knowing that both BEN and TROW are Dividend Champions with over 25 years of increasing their dividend payouts through all sorts of market noise.  There is risk nonetheless, and this point will cover TROW’s operations, fundamentals and valuation.

Business Overview

TROW is a major global investment management company founded in 1937 by Thomas Rowe Price Jr.  At the time asset managers generally charged flat commissions for fees, but Mr. Price charged fees based on the number of assets under management, and when the clients prospered, so did TROW.  This mutually beneficial fee structure along with a focused and disciplined long-term style of investing is still used to this day.  In 1986, TROW became a publicly traded company and has raised its dividend to shareholders each of the last 29 years since.  They currently manage over $772.7 billion in assets, serving individuals, financial intermediaries, and institutions.  TROW employs over 5,900 associates with offices in 14 countries around the world.

The company is a leader in the mutual fund investment world, currently offering over 75 different investment strategies. Many people think high cost mutual funds are dying with the rising popularity of low cost ETF’s, index funds, and self managed portfolios like my own; however, TROW’s number of assets under management (AUM) has been steadily increasing from $482 billion in 2010, to $746.8 billion at the end of 2014.  The AUM fees are the main source of TROW’s revenue and net income so this growing trend is very encouraging.  TROW has created impressive results for its clients, which is probably why 86% of those surveyed said they would recommend a one-on-one consultation to a friend or relative.

Fundamentals:

A $10,000 investment in TROW 20 years ago would be worth $213,791.66 today with dividends reinvested.  That’s a change of 2,038% and an average annualized total return of 16.64%:

2015_JUNE_TROW_totalreturnRevenue has grown from $1.512 billion in 2005 to $3.982 billion at the end of 2014 for a CAGR of 11.36%.  Earnings per share grew from $1.58 to $4.55 in the same time period for a CAGR of 12.47%.

2015_JUNE_TROW_financialdataThat’s impressive double digit CAGR growth over a long history, but future rapid growth might not come as easily for a while.  Short term noise and volatility is always a possibility, and here’s what management had to say in the 2014 annual shareholder letter:

After several years of very healthy returns from both stocks and bonds, we enter 2015 with more modest return expectations for both asset classes. Our view is that global equity markets will outperform fixed income markets but that absolute return levels will be modest. Whatever the investment environment, your company is well positioned. We have a wide range of investment capabilities and highly talented associates dedicated to meeting our clients’ needs. We remain focused on growing the long-term value of your investment.

TROW has had an impressive and responsible use of cash flow in the last decade continuing its global expansion in North America, Europe, the Middle East, and Australia.  They have zero debt which is almost unheard of for any business and makes them incredibly attractive as an investment.  They also invest into their own funds for growth and extra incentive to provide top notch performance.

The company shines with its rich dividend history.  From 2004 through 2014, the dividend grew from $.48 to $1.76 for a CAGR of 16% and an average dividend growth rate of 16.3%.  This doesn’t include the recent 18.18% dividend raise in March of 2015 or the $2 special dividend shareholders received in April.  While income growth may not be as strong in the future, I’d be happy with even a third of those percentages:

2015_JUNE_FG_TROW_DIVIDENDSThis lush history appears to support my investment objective of quick future income growth, but every great investment has risk and TROW is no stranger.

Risks Include:

  • Rising Popularity of Alternative Investment Vehicles
  • Economic Slowdowns
  • Mutual Fund Performances
  • Equity and Bond Prices

Valuation:

At first glance, a fast graph shows TROW is currently attractively valued with a blended P/E ratio of 16.8.  It’s also undervalued compared to its normal 20 year blended P/E ratio of 22.2:

2015_JUNE_FG_TROWAside from fully understanding a business, I try to invest with some sort of total return expectation which helps me understand whether or not the current stock price is trading at a fair value.  Using Chuck Carnevale’s precise return strategy, I’ve gained confidence in my moderate capital appreciation objective by estimating the following scenarios:

  • Analyst Estimates:  This calculation uses S&P Capital IQ data to help us predict a reasonable return:2015_JUNE_FG_TROW_analystWith growth capitalized at a reasonable P/E ratio of 15, we will have witnessed an impressive 11.22% total annual rate of return through 2018.  That’s a $26.14 gain in price per share and $9.84 gain in potential prorated dividend income.  TROW tends to hit or beat analyst expectations about 75% of the time:
  • 2015_JUNE_TROW_FG_ASHistorical Compounded Annual Growth Rate (No Analysts):  Here, I use the lowest annual earnings growth rate from the last decade which is a 7 year annual return to date of 9.6%:

2015_JUNE_FG_TROW_cagrWe see a total annualized return of 8.87% through 2018.  This is nice because TROW typically grows earnings much faster than the 9.6% used in the estimate.  In comparison, I calculated the 5 year earnings growth rate of over 22%, and it would have produced a stellar 37.26% annualized return through 2018.  I’d be happy to land anywhere in that range but am guessing it’ll be toward the low end.

  • Most Pessimistic Case: This calculation is based on the lowest normal P/E multiple of 19.9 over the last 3 years:

2015_JUNE_FG_TROW_pessimisticThis is pessimistic?  A 19.76% annualized return through 2018 would be extremely welcomed, but I’m guessing my return will be quite a bit less as the P/E and future growth come down.

  • Most optimistic Case:  This calculation is based on its highest premium normal 8 year PE ratio of 21.9:

2015_JUNE_FG_TROW_optimisticI love the thought that this company could exceed all expectations through 2018 and warrant this premium market valuation to provide a total annualized return of 22.84%.  My investment would double almost every 4 years at that rate, but I’d still be extremely satisfied with only 60% of that return.

Conclusion:

This investment looks set to meet my objectives of faster than usual dividend growth and moderate capital appreciation.  I believe TROW is currently trading at a very attractive valuation.  Even with my high allocation to the asset management industry I’d like to add more at current prices; or if we’re lucky, even lower.  Future results may not be as strong, but I’m excited to watch management adapt and continue to be a leader in an ever growing and changing sector of the market.

What are you investing in lately?  What are your thoughts on TROW?  A special happy Father’s day to all the Dad’s out there!  

My Dividend Growth

http://www.mydividendgrowth.com

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27 thoughts on “Recent Buy: June 17th, 2015
  1. roadmap2retire

    Nice purchase, Ryan. Looks like a solid buy. Looks like June is turning into quite a busy month for you – with plenty of cash being put to work.

    Really loved the article and the breakdown details. Appreciate you sharing the details.

    Best wishes
    R2R

     
    Reply
    1. My Dividend Growth

      It feels great adding this much forward income in a single month, it’s my biggest one yet. Thank you for the kind words, sharing is my pleasure! Hope all is well with you, R2R and have a great week!

       
      Reply
  2. Dividend Mantra

    Ryan,

    Nice buy!

    Glad to be a fellow shareholder. I think TROW will do quite well for us. Not sure about future returns, as that’s all guesswork, but if TROW’s last 20 years is any guide, they’ll continue to grow at a very attractive rate. Continued inflows bode well, though I think their lack of passive options is a potential headwind.

    Great job putting all that capital to work. June 2015 is a new high mark for you, my friend. 🙂

    Cheers!

     
    Reply
    1. My Dividend Growth

      Happy to join you finally, Jason. I’ve talked the talk on this one for a while but was hesitant because of my high allocation to the industry. I’m thinking these asset managers still have a lot of room to run. The positive net inflows are comforting, but I hear you on the passive option. The target date funds are stepping in the right direction, but services like betterment are becoming all the rage. Hopefully TROW can continue its fund’s out-performance to justify its fees and keep up with excellent R&D and innovation.

      Right back at you on capital invested, you’ve been tearing it up over there and giving me all sorts of ideas in the process. Thank you for that! Always great to hear from you 🙂

       
      Reply
  3. JC

    Im very bullish on the asset managers. Quasi toll road in a very important industry. Lots of companies are in my buy zones but im lower on capital right now so im being a bit pickier with my allocation. Looks like a solid pick up here Ryan!

     
    Reply
    1. My Dividend Growth

      I’m bullish right along with you, JC. The normal person isn’t a trader or diyer like us, and with an improving economy and job market there will always be money to invest. Cha Ching, TROW. I’m a little low on capital myself now, but may try to average down on CVX or iniate a position in XOM sometime soon. I’ve been so hesitant on energy, but really don’t want to miss an opportunity if this is all we’re getting. Might fire one or two bullets out there just in case. Thanks for the comment!

       
      Reply
  4. Ken

    Congrats on another great purchase Ryan. TROW is one of my favorite stocks and always shows up near the top of my screens. Keep it going!

    Ken

     
    Reply
    1. My Dividend Growth

      I appreciate that Ken, thanks. This is a fantastic company that would fit well in any DGI portfolio. The two main reasons I chose BEN first were BEN’s cheaper current valuation and lower payout ratio, but I think TROW will grow faster in the long run. Keep up the good work yourself my man and cheers!

       
      Reply
  5. Zero to Zeros

    Congrats on now owning stock in the two grand-daddies of the asset management industry, BEN and TROW! This was a fantastic and thorough analysis, as usual.

    Man, I’m mirin the amount of capital you are deploying these days. I wish I had 6 grand to invest every month, lol! That’s some crazy money you must be making!

    Keep up the awesome work, FI is well within your reach bro!

    Cheers

     
    Reply
    1. My Dividend Growth

      Thanks for that Alex, glad to see you pick up more forward dividends over there 🙂

      I struggled to put just $1400 to work last month, so a lot of this months contributions were leftover from then. I’m way ahead of my goal though, the wedding and honeymoon didn’t set me back quite as far as I thought it would. After this month I’m averaging about $3,300 a month. Hopefully I can keep it up through the end of the year. Best wishes and thanks for stopping by!

       
      Reply
  6. The Dividend Drive

    Nice buy, Ryan. I have pretty much the same percentage of financials exposure in my portfolio too. I don’t think it is too bad as long as it is in responsibly chosen, fundamentally sound companies which you certainly seem to be following!

    Keep up the good work!

     
    Reply
    1. My Dividend Growth

      Hey there, DD. Hope all is well and thanks for the support. That’s a good point about prioritizing an investment worth owning first, then worrying about allocation later. That’s especially true when we’re both so early into the journey, it’ll all balance out in the end. Good to hear from you!

       
      Reply
  7. Dividend Gremlin

    Ryan,

    Jeez $6k and the month is not yet over?? That by itself nuts. TROW is looking damn fine though, and that is a nice move. That TROW Performance Table you had there from FAST is simply outrageous too, to see that kind of YOY growth.

    I am looking forward to getting in on TROW or UNP soon, its going to be a hard choice.

    – Gremlin

     
    Reply
    1. My Dividend Growth

      Hehe, thanks Gremlin! I think I’ll end up breaking $7K in contributions for the month which is a new record, there was so much spill over from last months lack of ideas.

      TROW and UNP seem to be at attractive current valuations, and both have sweet looking fast graphs. I wish I could buy more here, but that might it for the month. Looking forward to what you pick, will be glad to have you aboard in either.

       
      Reply
  8. Dividend Hustler

    Awesome Month for you Ryan. Great analysis bud. Feels great investing into solid companies. What an addiction. Keep up the momentum my friend. You’re got this snowball rolling. Thank you for sharing and I wish us the best! Cheers.

     
    Reply
  9. DivGuy

    TROW has been so popular in the last month or so! I keep reading articles about it each week! I sure can’t blame the buyers, I can see why it is appealing. Good to see you’re keeping the buying mode!

    Cheers,

    Mike

     
    Reply
    1. My Dividend Growth

      It’s so true, I was loading up on BEN and missed the first TROW buying wave. I’m glad I got in where I did though, I like these asset managers quite a bit. Hope all is well with you, Mike! Thanks for commenting 🙂

       
      Reply
  10. Vivianne

    I like financial stock, hence >50% of my allocation. As the Greece situation get resolved, the fed will be more confident about increase rate, they won’t meet again until end of July or so. I’m looking to average down on some of my other investment like O, when the rate actually increase, it will adversely affect REITs at least in short term of 1-2 years.

    In the meanwhile, I’m enjoying the big jump in my account from the financial sectors. I’ll use the dividend and fresh capital to invest as some stocks like energy sector, some companies doing businesses oversea (increase rate also causes the dollars to go higher, therefore decrease revenue => stock price goes down! even there isn’t any fundamentally wrong with the stocks! that’s woukd be a good entry point.)

    If things doesn’t go as planned, I’ll keep my capital as emergency fund or use it for a another property downpayment, whichever come first.

     
    Reply
    1. My Dividend Growth

      Good to hear from you, Vivianne. Financials are so undervalued as a group, I think a lot of investors still have a sour taste in their mouth after the recession. It’s hard not to like several great businesses in that sector though. Glad to hear you’re getting into REITs finally as well, and it’s great that you’re a landlord to diversify everything even further. Realty Income (O) has been one of my best investments so far, and I’d love to add if it drops a bit more.

      I’ll be excited to hear about your next investment. So keep up the saving, in whichever vehicle you choose.

      Best,
      Ryan

       
      Reply
  11. Mark - DividendDeveloper

    I like it! I think TROW is a pretty compelling buy. It’s on my shortlist for next month. I think the one thing that stood out to me when I first came across it was the lack of debt. It’s not unheard of, but it is awesome to discover anyway. Makes me like the stock that much more. And honestly, having 10% in asset managers isn’t really a bad thing, especially with current demographic trends. At least it isn’t biotech!

     
    Reply
    1. My Dividend Growth

      Thanks, Mark! I see why everyone is buying TROW, it has such great historical performance. I’m very happy to be aboard. I think you’re right about asset managers, if I believe the market will do well over the next few decades, they should be hanging right in there with us. Hope all is well with you these days my friend!

       
      Reply
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