The whims of the market play a huge role in T. Rowe Price Group's (TROW -1.62%) financial results. That's just the norm for this asset manager, and it is prepared to weather even the harshest of bear markets.
The long-term goal when times are tough (i.e., to muddle through) is always the same, however, as the next bull market invariably leads to a business upturn. Here's how well T. Rowe Price is prepared for adversity today.
Complex business, simple story
T. Rowe Price is an asset manager, offering mutual funds and other products to investors. It charges fees to its customers in exchange for its investment services. Although the investment products might be different and even complex, it is the total dollar figure of assets under management (AUM) that shareholders watch as they judge the company's results.
Image source: Getty Images.
AUM changes in two broad ways. On the fringes, customers deposit money into their accounts or take money out. Bull markets tend to lead to deposits and bear markets to withdrawals. But overall, asset management customers tend to be pretty sticky because of the effort involved in moving money to a new company.
The bigger impact on AUM comes from the market itself, given that most of the money T. Rowe Price manages is invested in stocks and bonds. Bear markets lead to sizable AUM declines, and bull markets to notable increases.
Since changes in AUM basically dictate changes in the total fees T. Rowe Price generates, bear markets tend to result in earnings declines; bull markets lead to earnings improvement. It's just the typical cycle for an asset manager. Lately, the company has been dealing with an AUM decline (and thus weak earnings), so investors are negative on the stock.
Ready for the hit
Investors looking at T. Rowe Price's historically high 4.6% dividend yield can rest easy knowing that, given enough time, a bull is just around the corner. In fact, the stock market has already started toward one, with some market watchers calling the current uptrend a bull. (The Motley Fool is more strict on declaring a bull market, requiring both a 20% stock advance from recent bear market lows and new all-time highs in the benchmark indexes.)
Indeed, the company has increased its dividend annually for over 35 years, including the increase made at the start of 2023. That 35-year period, meanwhile, has included numerous bear markets.
For example, there's the deep market downturn during the Great Recession that started in late 2007, lingered through 2008, and lasted into early 2009. If T. Rowe Price's dividend could survive that period, when investors were worried about a global financial market collapse, there's no reason to believe that it will suddenly crumble today.
But there's some additional data to look at here if you need more evidence of the company's dividend resolve.
That evidence can be found on the balance sheet. For starters, T. Rowe Price has no long-term debt. Thus, there are no lenders breathing down its neck for interest payments or bonds that need to be paid off or rolled over.
On top of that, the company has roughly $2.1 billion in cash on its balance sheet. That's a big sum that can be tapped to support the dividend if there are any problems. It also has another $400 million in what the company calls discretionary investments, which it could presumably access if it needed. That brings its cash or near-cash total to roughly $2.5 billion. That's a lot of reason to feel comfortable with the dividend.
But that's not the end of the story. As an asset manager, T. Rowe Price needs to provide seed capital for products that it hopes to eventually sell to the public. Think of it as a start-up cost, in a way, since a new mutual fund needs to establish a track record, and the only way it can do that is by actually managing some real money.
The company has roughly $1.1 billion tied up in what it calls redeemable seed capital investments. In a dire situation, it could pull that money, too, to keep the dividend going. This is kind of like a redundant backup or an extra safety valve that should leave even the most conservative investor sleeping well at night.
There's little reason to worry
T. Rowe Price's business is inherently volatile and driven by Wall Street's ups and downs. If that kind of uncertainty turns your stomach, then you probably shouldn't own it.
However, if you can think long term, the dividend yield here is historically high and backed by a debt-free and cash-rich company -- plus there's the extra backstop offered by the $1.1 billion in redeemable seed capital investments. If that's not enough to ease your dividend worries, you might want to consider moving more money into your bank account.
