Over the past few weeks, we’ve witnessed a banking crisis the likes of which has not
been seen since 2008.
Starting with the Silicon Valley Bank run, a contagion spread, causing valid fear among
depositors about not being able to access their funds.
(South Park Clip).
Luckily, the U.S. government has stepped in insuring depositors.
Treasury Secretary Yellen has said that the government could backstop more deposits if
necessary to stop contagion.
That side of the risk equation now seems to be under control, however there is still significant
risk among financial institutions and their shareholders.
Following SVB, the financial sector stocks crashed with some seeing massive drops.
For example, First Republic Bank fell over 80%, Credit Suisse has tanked to all time
lows, and many regional banks saw sharp price declines.
Even seemingly high quality institutions like Charles Schwab saw 30% drops in the following
days.
So what Financial stocks did I buy in the aftermath of the 2023 banking crisis?
Well, I stayed away from the banking system despite compelling price drops.
Instead, I doubled down on largely unrelated financial stocks that I already owned.
For example, I bought 5 more shares of the investment manager, T Rowe Price Group.
Additionally, I bought more of one of my favorite dividend growth stocks, which I’ll share
at the end of the video.
Today, I’m going to explain why I think TROW stock is a top financial dividend stock
to buy in 2023.
My name is Zach, this is Dividend Data, and you should leave a like and subscribe if you
enjoy the video.
Throughout the analysis, I will be using my own fundamental stock research tool available
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First, let’s understand exactly how T Rowe Price makes money.
They charge fees for managing and administering investment portfolios, mutual funds, and other
investment products.
Therefore, revenue is primarily driven by the performance of its investment products
and the amount of assets under management.
As the company's assets under management grow, so does its revenue.
Conversely, as the assets under management decline, so does its revenue.
Since the current market crash started in late 2021, T ROWE Price has been on the negative
side of this cycle.
Their AUM continue to decline, leading to lower earnings.
This can be seen by the drop in their quarterly non-gaap eps.
Free cash flow per share decreased 33.96% from 2021 to 2022.
Net Income per share saw an even sharper 49.47% decline.
However, that was coming off a massive 31% growth in 2021.
This completely logical decline, given market conditions, has caused TROW stock to fall
over 50% in price.
In the past few months, I’ve been using this drop as a long-term buying opportunity.
T Rowe Price Group, ticker symbol TROW, is currently priced at $110.48 per share, valuing
the company at a market cap of $24.79 billion.
With the recent decline in both earnings and price, the company is trading at a 16 PE ratio.
The forward looking annual dividend is $4.88.
At the current price, that gives TROW stock a 4.42% dividend yield.
This is a very strong starting yield for a company that has demonstrated long-term growth
potential.
TROW is a dividend aristocrat stock, meaning they have consecutively increased their dividend
payment on an annual basis for over 25 years.
In fact, T Rowe Price has over 36 years of consecutive dividend increases.
They recently announced a small 1.67% increase.
This is expected after a weak 2022.
Prior to this, when the stock had many years of large growth.
11%, 20%, 18%.
8%, 22%, 5%, etc.
On top of this, the T Rowe Price board has a practice of issuing large special dividends
when they have excess cash on hand.
This is in addition to their regular quarterly dividend.
For example, in 2021 they issued a $3 per share special dividend.
T Rowe Price stock spins off a lot of cash which helps juice returns and add to your
compounding effect.
These dividend payments are very sustainable too.
The payout ratio is around 50% and often far less.
Earnings were so good in 2021 that the payout ratio was 55% even with the large special
dividend.
Despite falling earnings in 2022 likely to continue throughout 2023, TROW’s dividend
remains rock solid.
With the current fall in price, the starting yield is the highest since 2009.
From the dividend-based perspective, this could be a great entry point.
They are a low-cost business and have a strong balance sheet.
Even in a declining 2022, the company generated over $2 billion in free cash flow.
I’d expect it to be around this or slightly lower in 2023.
We will know more when the company announces their Q1 earnings on April 27th.
Although I think T Rowe Price stock is likely a good long-term buy at current prices, there
are still significant risks.
At the core, the stocks earnings are highly correlated to market performance.
Therefore, economic factors leading to earnings recessions or lower stock valuations would
heavily impact the company.
Specifically, I view interest rates as the largest risk in 2023.
Higher rates not only lower the valuation of stocks, but make them less attractive relative
to risk-free rates of return.
This can lead to a cycle of continued outflow, like we’ve been seeing over the past year.
If rates continue increasing and stay high for a long-time, then TROW stock could remain
low for the foreseeable future.
However, when market conditions change or signs of lowering rates then TROW stock will
likely start a long-bullish run.
Dividend growth will accelerate and a special dividend would likely follow.
Luckily, we will hear more from the Fed soon on future interest rate increases.
Will they continue the 25 bps hikes or pause sooner than expected.
We will see.
Personally, I think we are closer to the end of this Fed tightening cycle and a lot of
the damage is already priced into TROW stock.
However, I am trying remaining conservative and dollar cost averaging into TROW when I
find the price attractive.
Recently, I bought 5 shares of TROW stock at an average cost of $104.27 per share.
Overall, I now have 77.39 shares, valued at $8,550 with a $111.05 cost per share.
The other financial dividend stock I’ve been buying is Visa, ticker symbol V. I bought
1 share at $211.11.
Visa is an extremely capital efficient business, with huge growth drivers.
My plan is to continue dollar cost averaging into the stock on dips.
If you want to see my full T Rowe Price and Visa Stock review videos, they will be linked
in the description below.
That said, don’t take my analysis as the gospel and be sure to do your own research
before making any investing decisions.
Thank you for watching Dividend Data.
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Thanks for watching!