Saturday, April 11, 2015

T Rowe Price Dividend Stock analysis

Hello, this is Div4Son. 

After reviewing my portfolio last month, I found that I was lacking in the financial sector. After looking at several companies,  T Rowe Price is a good company to buy at this moment. 

In this article, I am illustrating my strategy of picking a stock. My basic strategy is:

Good quality + high yield + high growth (+ time & patience)

This strategy follows the same framework as the SBI book. 

About T Rowe Price 

T. Rowe Price Group  provides investment management services to individual and institutional investors in the T. Rowe Price mutual funds and other investment portfolios. The Company manages U.S. and international stock, blended asset, bond and money market mutual funds. 


Summary of Criteria 


TROW Current price 80.98AreaCriteriaCheckListComment
Quality Company
Dividend Growth>5 yearsYes29 years
ROE/EPS/Op MarginStableYesSee Chart
Avg GrowthStableYesSee Chart
FCF over DividendsYesYesSee Chart
M* MoatWide MoatYesM* Wide
M* & S&P
Credit Rating
> BBB+YesNo Debt
Cash to Debt & Interest CoverageCash Debt >1 or Interest > 5YesNo Debt
M* & S&P Stars> 3 Stars for bothYesM* 3 Stars S&P CapIQ 4 Stars A- quality rating
Payout Ratio<60%Yes38%
Dividend Growth
& Yield
Dividend Yield>3%No2.5
Dividend Growth>5%Yes5Y CAGR 11.9%
Chowder>12%Yes 14.4
Valuation
Yield/Avg Yield>1.1Yes1.25
Dividend Yield Theory Mid PointBelow Mid PointYesMid Point 100; Low Point 73
DRRM~10%YesAssuming 6% growth; projected return=10.16%
M* Estimate<M* estYesM* 89.00
S&P Estimate< S&P cap IQ estYesS&P Cap IQ 92.00
Data from M*, gurufocus, yahoo finance, S&P CapitalIQ, David Fish CCC list

Quality analysis

Years of Dividend raises

TROW has 29 years of dividend raises. This is a good indication of continued dividend raises. 

Stability of key metrics

These ratios provide an indication of how wide the moat is. I am looking for overall stability. If the ratios decline year over year, then this is an indication of moat reduction. 
I also compare these ratios with other companies within the same sectors.  As you can see, trow is showing stability in these ratios. Moreover, these ratios compare well with its peers. 

Average growth 

Here, I look for the stability of growth indicators over ten years.  TROW has stability in these metrics which is a good sign for continued growth. 

Free cash flow over dividends 

I use the free cash flow per share and compare this with dividends per share. FCF should cover the dividends.  TROW 's FCF clearly covers the dividends it pays out by a large margin. 

M* Moat

I simply use the moat indicator from morningstar to validate my findings.  TROW has a wide moat due to its stickiness of the AUMs in retirement accounts. 

I have a couple of IRA funds in TROW for several years now. While I do am thinking about converting these to dividend paying stocks, I think most people just leave their Ira and 401ks to asset managers. 

Credit rating

Here, I look for companies with credit rating of BBB+. Just like banks wanting good credit from you when you apply for a loan, you want companies which are stable from a credit perspective. 

Well, TROW  has no debt so it doesn't have a credit rating. 

Debt

I look at the debt to equity ratio (<50) and cash to debt and interest coverage.  Sometimes, a little good debt is good to push a business, but too much debt can be crippling.  TROW has no debt. I don't have any debt and I like companies with low or no debt. 

M* and S&P capital IQ rating

I am looking for 3 stars and above from either. A four star is a bonus.  M* gives 3 Stars and S&P CapIQ gives 4 Stars with as A- quality rating. 

Dividend Yield and growth 

Ideally, a yield better than 3% is preferred, but depending on the chowder rule and dividend growth I am okay with lower yields. 

With the dividend growth 11.9%, the combined yield and growth for TROW is greater than 12%. 

Value analysis

Average yield

The current yield per average yield for 5 years ratio is greater than 1.25 for TROW. I use this as a quick indicator for fair valuation (if greater than 1.1). 

Dividend yield theory mid point

Using the dividend yield theory spreadsheet (based on the Dividends Don't Lie book), I calculate the mid and high points for the yield, from which I derive the price. 

Note: You can get the spreadsheet at: http://div4son.blogspot.com/2015/03/dividend-yield-theory-spreadsheet.html



TROW Mid Point price is 100; the  Low Point price is 73 

Therefore, TROW is between the low and fair price points. 

I am okay to buy great companies at reasonable prices and I think the price is reasonable for TROW. 

Based on recent yield history, the price can drop lower. If this happens I will be glad to buy more TROW shares if the same fundamentals are maintained. 

Dividend Drill Return Model

Also, using the dividend play book DDRM model per the Dividend Playbook, I try to estimate the total return. 


DDRM
Dividend Rate ($)2.02
Divided by: share price80.98
Current yield (%)2.50
Core Growth Estimate (%)6.00
Divided by: ROE (%)23.87
Multiplied by: EPS ($)4.55
Cost of Growth (%)1.14
Earnings per Share ($)4.55
Minus: Dividend2.02
Minus: Cost of Growth1.14
Funding Gap ($)1.38
Divided by: Share Price ($)80.98
Share Change (%)1.71
Core Growth (%)6.00
Plus: Share Change (%)1.71
Total Dividend Growth (%)7.71
Plus: Dividend Yield (%)2.50
Projected Total Return (%)10.21

Assuming a very conservative 6%, I estimate the projected return to be just over 10%. I am happy with anything around 10%. 

M* and S&P valuations 

Morningstar gives trow a fair value of 89. S&P capIQ gives a fair value if 92. Therefore, with a current price around 81, trow is reasonably priced. 

Risks

Trow could be more diverse. Three quarters of total AUM are tied up in equity

and balanced strategies. There are outflows risks from institutional investors. Overall, I believe these risks are manageable.

--

I bought 20 shares of TROW on March 31. This gives me a forward dividend of $41.60.  Moreover, I bought these stocks before the ex dividend date for the bonus $2 per share dividend - which will add to the forward dividend.

TROW had a bonus a couple if years ago. You gotta love companies who give back to the shareholders!

That's all for now. Please let me know if you like this format. I give credit to Mr Money Unbinding (http://moneyunbinding.blogspot.com/) who uses a similar analysis/stocking picking criteria to mine. I cloned most of his template for the summary. 

Div4son

Disclosure - long TROW 

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