Here are some highlights from my recent, detailed quantitative analysis of T. Rowe Price Group Inc. (TROW). The company (formerly known as T. Rowe Price Associates) operates one of the largest no-load mutual fund and life cycle fund complexes in the United States.

Fair Value

In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value. See page 2 of the linked PDF for a detailed description:

1. Average high yield price
2. 20-year DCF price
3. Average P/E price
4. Graham number

TROW has recently been seen trading at a discount to the average high yield price. When also considering the NPV MMA Differential, the stock has been trading at a 14.1% premium to its calculated fair value of $98.94. TROW did not earn any Stars in this section.

Dividend Analytical Data

In this section, there are three possible Stars and three key factors to look at. See page 2 of the linked PDF for a detailed description:

1. Free cash flow payout
2. Debt to total capital
3. Key metrics
4. Dividend growth rate
5. Years of dividend growth
6. Rolling 4-year dividend > 15%

TROW earned two Stars in this section for its debt to total capital and its key metrics. The stock earned a Star as a result of its most recent debt to total capital being less than 45%. The stock also earned a Star for having an acceptable score in at least two of the four key metrics measured. The company has paid a cash dividend to shareholders every year since 1986, and it has increased its dividend payments for 36 consecutive years.

Dividend Income vs. MMA

Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA differential
2. Years to > MMA

The NPV MMA differential of the $364 is below the $500 target I look for in a stock that has increased dividends as long as TROW has. The stock's recent yield of 4.32% exceeds the 3.75% estimated 20-year average MMA rate.

The company's peer group includes: The Franklin Resources, Inc. (BEN), with a 4.5% yield, and BlackRock Inc. (BLK), with a 2.9% yield.

Conclusion

TROW did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section, and did not earn any Stars in the Dividend Income vs. MMA section for a total of two Stars. This quantitatively ranks TROW as a 2-Star Weak stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $104.35 before TROW's NPV MMA differential increased to the $500 minimum that I look for in a stock with 36 years of consecutive dividend increases. At that price, the stock would yield 4.7%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA differential, the calculated rate is 2.5%. This dividend growth rate is above the 1.7% used in this analysis, thus providing no margin of safety. TROW has a risk rating of 1.50, which classifies it as a low risk stock.

With a well-respected brand and a strong market share, TROW is well-positioned as an asset manager. It consistently produces net client inflows based on the relative performance of its funds. TROW's target-date retirement funds should continue to be an attractive option with baby boomers now that they have reached retirement age.

With very little debt, higher return on earnings, and improving investor sentiment, the company is strong contender within its industry. The stock has recently been seen trading above its calculated fair value of $98.94. For now, I will not initiate a position in TROW.

More By This Author:

The Clorox Company Dividend Stock Analysis
Exxon Mobil Corporation Dividend Stock Analysis
Verizon Communications Inc. Dividend Stock Analysis