Asset manager T. Rowe Price (TROW -1.62%) has an impressive dividend history, with an annual dividend increase in each of the past 37 years. The dividend yield today is roughly 4.6%, which is toward the high end of the company's historical yield range. There are many things to like about this iconic mutual fund company, but there's also one negative that investors need to keep an eye on.
AUM is the big number for T. Rowe Price
From a big-picture perspective, T. Rowe Price's business is pretty simple to understand. Customers give it money, and it charges them a fee to manage that money. Generally, the fee is a set percentage of the assets a customer has with T. Rowe Price. The more money the company manages, the greater the fee income it generates. The less money it manages, the less it earns in fee income.
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Clearly, asset management is a complex business. But the basic model here is pretty straightforward. This is why investors pay very close attention to assets under management (AUM). This number is the total sum of the money that customers have given T. Rowe Price to manage on their behalf.
There are two big drivers when it comes to AUM for T. Rowe Price, which has a very well-established business. The largest is the performance of the markets. That was a big benefit in the second quarter of 2023, leading AUM at the end of the quarter to rise 6.8% from a year ago and 4.3% sequentially from the first quarter.
In total, what the company describes as "net market appreciation and gains" boosted AUM by $77.7 billion in the quarter. And yet, total AUM only increased by $57.7 billion. The difference is the $20 billion that customers pulled out of their T. Rowe Price accounts. Customer flows are the second big driver of AUM.
TROW Dividend Yield data by YCharts.
A long-term trend that needs to be monitored
Investors withdraw money from their accounts for any number of reasons. For example, withdrawals tend to increase during times of economic uncertainty, as worried investors essentially look to get out of the market. There's no way to fully quantify why the money was pulled from T. Rowe Price. But investors need to monitor what the company calls "net cash flows" just the same. There are two big long-term reasons for this.
In fairness, T. Rowe Price tends to have a sticky business, since moving assets between companies can be difficult. But a huge amount of wealth is concentrated in the hands of older adults, who have been saving for their retirement years. With the baby boomer generation flowing into retirement, there's likely to be a pickup in withdrawals for living expenses (and maybe a few splurges).
There's not a whole lot T. Rowe Price can do about this other than try to attract new customers. That, however, could be harder to do than it seems. Why? There has been a notable shift among investors toward cheaper exchange-traded funds (ETFs) and away from the mutual funds that are the traditional foundation of T. Rowe Price's business. Basically, younger investors have more options, and mutual funds aren't the top pick anymore. There's been a long drip of cash leaving most mutual fund companies, T. Rowe Price included.
To its credit, T. Rowe Price is changing with the times. It has its own line of ETFs, and it has been building an alternative assets business, an area that has seen continued investor demand. But there's only so much either of these initiatives can do given the large scale of the company's mutual fund operation. For example, alternative assets only account for around 3% of the company's AUM.
There's a bright future, but still a slow and steady drain
Operating an asset management business tends to be pretty profitable since T. Rowe Price basically gets to leverage its management efforts across vast sums of money. To simplify, adding more money to a fund doesn't change the company's costs very much. So, T. Rowe Price is still a very strong business, particularly given that it has no long-term debt and $2.2 billion of cash on its balance sheet. Dividend investors shouldn't worry too much about dividend safety here. But if you are an income investor buying this high-yield stock, you still need to pay close attention to the lingering fundamental headwinds to assets under management. Even if T. Rowe Price can't stem the slow leak of cash, you'll at least want to make sure it keeps the outflows to a minimum so that market gains can offset the impact.
