T. Rowe Price Stays at Neutral

We maintain our Neutral recommendation on T. Rowe Price Group Inc.(TROW - Analyst Report) based on the company’s steady profit trend. Moreover, T. Rowe Price’s third quarter earnings came in below the Zacks Consensus Estimate, but were significantly up from the prior-year quarter.

Although the global financial crisis has led to a decline in growth metrics, the company has been able to sustain positive earnings throughout the critical period. This positive   operating leverage was helped by strong brand, consistent investment track record and strong business volumes.

T. Rowe Price remains debt free with substantial liquidity including cash and mutual fund investment holdings. This has helped in strengthening the company’s capital leverage and generating return on earnings that is substantially higher than the industry average. These growth drivers also paved the way for an industry-leading dividend yield, thereby creating ample investor confidence and scope for investment and growth opportunities in future.

In February 2011, T. Rowe Price’s board of directors approved a 15.0% hike in the company’s quarterly common stock dividend. The revised quarterly dividend now stands at 31 cents per share. This marks T. Rowe’s 25th consecutive year of dividend increase, reflecting the company’s commitment toward returning value to shareholders with its strong cash generation capabilities.

On the flip side, in the current unsettled environment, the company experienced reduction in assets under management (AUM) in the third quarter of 2011, including $2.6 billion in net cash outflows as investors looked to reduce risk from their portfolios. Moreover, among the company’s peers, BlackRock Inc. (BLK - Snapshot Report) also reported a decline in AUM of $3.35 trillion as of September 30, 2011, down 9% sequentially and 3% year over year. The decrease was due to market-related declines across products.

Furthermore, T. Rowe Price incurs significant expenditure to attract investment advisory clients and additional investments from the existing clients. These efforts often involve costs that precede any future revenues that may be recognized from an increase in AUM. Based on its current strategic projects and plans, T. Rowe Price has estimated capital expenditures for fiscal 2011 to be nearly $93 million.

T. Rowe Price’s fundamentals remain strong with debt-free position, higher return on earnings and improving investor sentiment. Besides, relative mutual fund performance remained positive. The company has the potential to take advantage of the economic recovery and benefit from the growth opportunities in the domestic and global AUM. However, increase in capital expenditures from 2010 levels and competitive pressure remain the main causes of concern.

However, T. Rowe Price currently retains a Zacks # 2 Rank, which translates into a short-term ‘Buy’ rating.

Read the full analyst report on TROW

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