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Analyst Blog

On Sep 9, 2013, we reiterated our long-term recommendation on T. Rowe Price Group, Inc. (TROW - Analyst Report) at Neutral based on the company’s debt-free position, higher return on earnings and improving investor sentiment. However, higher operating expenses and stringent regulatory norms could be concerns.

Why Neutral?

T. Rowe Price reported its second-quarter 2013 net income of 92 cents per share, missing the Zacks Consensus Estimate by a sliver. However, this significantly outperformed the year-ago earnings of 79 cents. Results improved on a year-over-year basis, driven by top-line growth, a strong capital position and improved AUM.

T. Rowe Price remains debt free with substantial liquidity that includes cash and mutual fund investment holdings of about $2.7 billion. This has assisted in strengthening the company’s capital leverage and generating a return on earnings that is substantially higher than the industry average.

The company is an attractive asset for yield-seeking investors due to its strong capital deployment activity. In Feb 2013, T. Rowe Price’s board of directors approved a 12.0% hike in the company’s quarterly common stock dividend. The revised quarterly dividend now stands at 38 cents per share. This marks T. Rowe’s 27th consecutive annual dividend increase, reflecting the company’s commitment to return value to shareholders with its strong cash generation capabilities.

However, elevated operating expenses remain a major concern for T. Rowe Price. Total operating expenses jumped 9.4% year over year in first-half 2013, driven by higher compensation and related expenses. Moreover, the company incurs significant expenditures to attract new investment advisory clients and additional investments from existing clients. These efforts involve costs that generally precede future revenues, thereby affecting the overall profitability of the company.

For T. Rowe Price, the Zacks Consensus Estimate for 2013 and 2014 has remained stable at $3.74 and $4.11 per share, respectively, over the last 7 days. Hence, the company carries a Zacks Rank #3 (Hold).

Other Major Companies to Consider

Some investment managers that are worth considering include Affiliated Managers Group Inc. (AMG - Analyst Report), Noah Holdings Limited (NOAH - Snapshot Report) and Virtus Investment Partners Inc. (VRTS - Snapshot Report). All the companies carry a Zacks Rank #2 (Buy).

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