I recently sold a mutual fund in my Merrill Edge account (not tracked on this site) which freed up a little over $1k in cash. I was able to combine this with some monthly savings to make a purchase in my Dividend Empire portfolio.
The goal of this portfolio is to accumulate high quality dividend growth stocks that I will pass on to my descendants. Through the power of dividend growth and compounding, this portfolio will turn into a dividend paying empire for my family.
I have outlined my dividend stock selection process on my methods page. While I am very pleased with my method and my stock selections so far, the process of going through all of the stocks on David Fish’s CCC list manually is daunting. The last time I went through the exercise it took me almost the entire day (many thanks to David by the way – I can’t imagine how long it would take me without his amazing resource). Since I am a numbers guy I decided to come up with a scoring system to automate a portion of the stock selection process.
This scoring system ranks all of the stocks from the CCC list based on various parameters including dividend strength (yield, growth, payout ratio, etc), financial strength (past and future earnings growth, debt, etc) and a couple of objective parameters like valuation and support/resistance levels. I will provide details and rationale around this new ranking system in a future post. For now I will just tell you that the highest ranking stock from my May CCC screen was T Rowe Price Group (TROW), which had a score of 8.5 out of a possible 10.
The word automated is a bit misleading. I don’t just run this screen and automatically purchase the stocks at the top of the list. I use this screen to automatically cut the hundreds of stocks on the CCC list down to what I consider to be the best 20 or 30, then I research this new group of stocks in detail. After researching these top stocks from the screen I decided that now is a great time to add TROW to my portfolio (see analysis below).
T Rowe Price (TROW) Purchase Details
- Purchase date: 5/18/2015
- Portfolio: Dividend Empire
- Sector: Financials
- Industry: Asset Management
- Shares purchased: 19
- Cost per share: $81.9899
- Commissions: $4.95
- Cost basis: $1562.76
- Yield: 2.53%
- Expected annual income: $39.52
Overview of T. Rowe Price
From the T. Rowe Price Investor Relations website:
Founded in 1937, Baltimore-based T. Rowe Price is a global investment management organization with $772.7 billion in assets under management as of March 31, 2015. The organization provides a broad array of mutual funds, subadvisory services, and separate account management for individual and institutional investors, retirement plans, and financial intermediaries. The organization also offers a variety of sophisticated investment planning and guidance tools. T. Rowe Price’s disciplined, risk-aware investment approach focuses on diversification, style consistency, and fundamental research.
TROW Dividend Analysis
T Rowe Price has increased their dividend for 29 consecutive years, clearly demonstrating a commitment to paying their shareholders. The current yield is a bit low at 2.53%, but the TROW dividend growth should more than make up for it.
The five year average dividend growth for TROW is over 14% and has been accelerating recently with increases of 16% in 2014 and 18% in 2015 (special dividend payments have been removed). If the TROW dividend continues to grow at a 14% annual rate I can expect a yield on cost of around 4.88% in 5 years.
One thing I like to look for in a dividend growth stock is the company’s ability to continue paying and increasing their dividend during difficult times. TROW’s earnings declined during two different periods, 2002-2003 and 2009-2010, but they were still able to increase their dividend.
Finally, T Rowe Price has a very reasonable EPS dividend payout ratio of 38.5 and a free cash flow (FCF) payout ratio of 40.7. With very strong growth in both earnings and FCF, TROW should be able to easily cover their current dividend and future dividend increases.
TROW Financial Analysis
Earnings and revenue have been increasing at a rapid pace recently, with 5-year annual earnings growth of 22% and revenue growth over 15%. In 2015 earnings are expected to grow 8.5% compared to the industry average of just 2.7%. Analysts expect earnings to grow an average 12.1% over the next 5 years, increasing every year through 2018. Finally, the TROW does not carry any long-term debt.
Their excellent dividend and earnings growth in combination with zero debt make TROW a very strong company right now.
TROW currently trades at PE ratio of 18.41 which is lower than the industry average of 25.9 (calculated from Google Finance data). Fifteen analysts cover TROW and 7 have a strong buy recommendations, 7 have hold recommendations and there is 1 sell recommendation. The analysts consensus price target for TROW is $88 per share.
A discounted cash flow analysis of TROW (EPS=4.59, 10yr growth=12.1%, 10yr terminal growth=4%, discount rate=10%) results in fair value estimate of $92.27. The analysts consensus target and the discounted cash flow fair value estimates are in relative agreement and there appears to be some margin of safety in TROW right now.
This purchase in my Dividend Empire portfolio provides some exposure to the Asset Management industry. Adding TROW to this portfolio provides $39.52 in annual income, bringing the portfolio total to $577. My yield on cost for TROW is 2.53%, decreasing my portfolio yield on cost from 3.43% down to 3.35%. This decrease is acceptable since I expect the recent TROW dividend increases to continue.
What are your thoughts on this purchase? Do any of you own TROW in your dividend growth portfolios?