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Organic Growth Aids T. Rowe Price (TROW) Despite High Costs
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T. Rowe Price Group, Inc. (TROW - Free Report) remains focused on fortifying its business by enhancing investment capabilities, broadening distribution reach and deepening client partnerships to support long-term growth. However, elevated operating expenses are likely to impede bottom-line growth for the company. Increased dependence on investment advisory fees is concerning, as the changes in asset under management (AUM) could hurt this revenue source.
Organic growth remains a key strength at T. Rowe Price, as reflected by its revenue growth story. Net revenues saw a three-year (ended 2022) compound annual growth rate (CAGR) of 2.2%. Though the trend reversed in the first nine months of 2023, the mix shift toward international growth funds is expected to help increase revenues and the investment management margin of the company. Our model estimates total revenues to witness a CAGR of 1% over the next three years (ending 2025).
TROW’s earnings have been supported by its diversified AUM across various asset classes, client base and geographies. The company’s AUM balance witnessed a CAGR of 5.2% over the past five years (2017-2022), with the momentum continuing in the first nine months of 2023. Strong brand, consistent investment record and decent business volumes are expected to keep supporting AUM growth. Our model projects AUM to increase, seeing a CAGR of 3% over the next three years ending 2025.
T. Rowe Price has made efforts to expand its business operations on the back of inorganic activities. The buyouts of Retiree and Oak Hill Advisors, L.P. expanded its existing retirement capabilities and bulked up its offerings in the alternative investment market space, respectively. Such moves underline TROW’s commitment toward diversifying its revenue streams and meeting customer needs, thereby supporting long-term prospects.
T. Rowe Price exhibits a strong liquidity position. This aids in impressive capital distribution activities. It has hiked quarterly dividends every year since its IPO in 1986. Further, in 2020, the board of directors increased the common share repurchase authorization by 10 million shares, bringing the total authorization to 22.4 million shares. As of Sep 30, 2023, 7.4 million shares were available under the authorization.
Elevated operating expenses are major concerns for T. Rowe Price. Expenses escalated at a three-year (ended 2022) CAGR of 9%. The rising trend continued in the first nine months of 2023 as well. The company incurs significant expenditure to attract new investment advisory clients and additional investments from existing clients. Also, TROW invests substantially to upgrade technology. Going forward, an increase in expenses, based on higher compensation benefits and technological advancements, will likely affect the company’s bottom-line growth. We expect total operating expenses to witness a CAGR of 3.5% by 2025.
Investment advisory fees are the biggest source of revenues for T. Rowe Price, comprising around 90% of its net revenues (as of Sep 30, 2023). The increased dependence on these could affect the company's financials in the near term, as changes in AUM due to market fluctuations and foreign exchange translations, regulatory changes, or a sudden slowdown in overall business activities could hurt this revenue source. We estimate investment advisory fees to comprise 89% of net revenues in 2023.
The majority of the assets under T. Rowe Price's purview are invested in U.S. equities. This product category has been most susceptible to market share losses due to the heightened adoption of passive investments via index funds and exchange traded funds. The continuously increasing trend in passive investing has affected the company's new client inflows.
Over the past six months, shares of T. Rowe Price have gained 0.3%, comparing with the industry’s rise of 18.8%.
Some better-ranked stocks in the banking space are Prospect Capital (PSEC - Free Report) and BrightSphere Investment Group (BSIG - Free Report) . At present, PSEC sports a Zacks Rank #1, whereas BSIG carries a Zacks Rank #2 (Buy).
Over the past six months, PSEC shares have jumped 14.7%, whereas the BSIG stock has rallied 5.2%, respectively.
Over the past 30 days, the Zacks Consensus Estimate for Prospect Capital and BrightSphere Investment’scurrent-year earnings has been unrevised.
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Organic Growth Aids T. Rowe Price (TROW) Despite High Costs
T. Rowe Price Group, Inc. (TROW - Free Report) remains focused on fortifying its business by enhancing investment capabilities, broadening distribution reach and deepening client partnerships to support long-term growth. However, elevated operating expenses are likely to impede bottom-line growth for the company. Increased dependence on investment advisory fees is concerning, as the changes in asset under management (AUM) could hurt this revenue source.
Organic growth remains a key strength at T. Rowe Price, as reflected by its revenue growth story. Net revenues saw a three-year (ended 2022) compound annual growth rate (CAGR) of 2.2%. Though the trend reversed in the first nine months of 2023, the mix shift toward international growth funds is expected to help increase revenues and the investment management margin of the company. Our model estimates total revenues to witness a CAGR of 1% over the next three years (ending 2025).
TROW’s earnings have been supported by its diversified AUM across various asset classes, client base and geographies. The company’s AUM balance witnessed a CAGR of 5.2% over the past five years (2017-2022), with the momentum continuing in the first nine months of 2023. Strong brand, consistent investment record and decent business volumes are expected to keep supporting AUM growth. Our model projects AUM to increase, seeing a CAGR of 3% over the next three years ending 2025.
T. Rowe Price has made efforts to expand its business operations on the back of inorganic activities. The buyouts of Retiree and Oak Hill Advisors, L.P. expanded its existing retirement capabilities and bulked up its offerings in the alternative investment market space, respectively. Such moves underline TROW’s commitment toward diversifying its revenue streams and meeting customer needs, thereby supporting long-term prospects.
T. Rowe Price exhibits a strong liquidity position. This aids in impressive capital distribution activities. It has hiked quarterly dividends every year since its IPO in 1986. Further, in 2020, the board of directors increased the common share repurchase authorization by 10 million shares, bringing the total authorization to 22.4 million shares. As of Sep 30, 2023, 7.4 million shares were available under the authorization.
Elevated operating expenses are major concerns for T. Rowe Price. Expenses escalated at a three-year (ended 2022) CAGR of 9%. The rising trend continued in the first nine months of 2023 as well. The company incurs significant expenditure to attract new investment advisory clients and additional investments from existing clients. Also, TROW invests substantially to upgrade technology. Going forward, an increase in expenses, based on higher compensation benefits and technological advancements, will likely affect the company’s bottom-line growth. We expect total operating expenses to witness a CAGR of 3.5% by 2025.
Investment advisory fees are the biggest source of revenues for T. Rowe Price, comprising around 90% of its net revenues (as of Sep 30, 2023). The increased dependence on these could affect the company's financials in the near term, as changes in AUM due to market fluctuations and foreign exchange translations, regulatory changes, or a sudden slowdown in overall business activities could hurt this revenue source. We estimate investment advisory fees to comprise 89% of net revenues in 2023.
The majority of the assets under T. Rowe Price's purview are invested in U.S. equities. This product category has been most susceptible to market share losses due to the heightened adoption of passive investments via index funds and exchange traded funds. The continuously increasing trend in passive investing has affected the company's new client inflows.
Over the past six months, shares of T. Rowe Price have gained 0.3%, comparing with the industry’s rise of 18.8%.
Image Source: Zacks Investment Research
Currently, T. Rowe Price carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Peer Stocks to Consider
Some better-ranked stocks in the banking space are Prospect Capital (PSEC - Free Report) and BrightSphere Investment Group (BSIG - Free Report) . At present, PSEC sports a Zacks Rank #1, whereas BSIG carries a Zacks Rank #2 (Buy).
Over the past six months, PSEC shares have jumped 14.7%, whereas the BSIG stock has rallied 5.2%, respectively.
Over the past 30 days, the Zacks Consensus Estimate for Prospect Capital and BrightSphere Investment’scurrent-year earnings has been unrevised.