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T. Rowe Stock Rose, New Assets Are a Concern

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Dividend stock

T. Rowe (TROW) stock rose 8% over the past three months mainly due to a strong operating performance in 3Q16. The company saw net income expansion of 18% and operating income growth of 4% in 3Q16 on advisory fees, performing funds, and net assets in retirement funds. The company also rewards its shareholders with high dividend payouts. The average dividend paid rose 133% since 2006.

Currently, T. Rowe is trading at a one-year forward PE (price-to-earnings) multiple of 15.2x. In comparison, the industry average is 14.9x. T. Rowe’s growing net income, partially offset by stable flows, helped the company command premiums.

Its competitors are trading at the following one-year forward PE ratios:

  • BlackRock (BLK) – 16.9x
  • Bank of New York Mellon (BK) – 13.7x
  • State Street (STT) – 13.8x

Together, these companies form 8.8% of the Vanguard Financials ETF (VFH).

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Improving performance

T. Rowe’s biggest contributor has been mutual fund offerings. In a three-year period, 84% of the mutual funds managed by the company outperformed the comparable Lipper averages.

The third quarter results improved sequentially and on a year-over-year basis mainly due to performance helped by broad market appreciation. The company manages $813 billion as of September 30, 2016. It accounts for a big part of the industry. Moreover, the company’s assets under management this quarter rose solely on the back of market appreciation.

Among the company’s competitors, Vanguard, BlackRock (BLK), and alternative managers like Carlyle (CG), Blackstone (BX) are attracting sizable assets on the back of ETFs and alternative offerings. T. Rowe is carrying higher fees than ETFs that provide a cost-effective solution and generate lower returns than alternative offerings. As a result, the company is seeing lower flows towards its traditional offerings.

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