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Organic Growth Aids T. Rowe Price (TROW), High Costs Ail

T. Rowe Price Group, Inc.’s TROW diversified business model, solid assets under management (AUM) balance and strong liquidity position keep supporting its financials amid a tough operating backdrop. Rising costs and increased dependence on investment advisory fees are woes.

Revenue growth remains a key strength at T. Rowe Price, with net revenues seeing a five-year (ended 2021) compound annual growth rate (CAGR) of 12.1%. It witnessed a decline in the metric in the first half of 2022 due to the impact of declining markets on the AUM balance. Nonetheless, the company remains focused on fortifying its business by enhancing investment capabilities, broadening its distribution reach and deepening client partnerships to support long-term growth.

In the upcoming quarters, the mix shift toward international growth funds is expected to help increase revenues and investment management margin of the company. For the five years ended Jun 30, 2022, 66% of the T. Rowe Price U.S. mutual funds AUM outperformed the Morningstar median, while 60% outperformed the passive peer median.

TROW’s debt-free position with substantial liquidity has aided in impressive capital deployment activities. It has hiked quarterly dividends every year since its IPO in 1986, the most recent being a sequential hike of 11.1% in February 2022 to $1.20 per share. This was T. Rowe Price’s 36th consecutive annual dividend increase.

Also, the company has a common share repurchase program, through which 3.8 million shares were bought back by the firm for $519.6 million in the first half of 2022. Such efforts reflect the company’s commitment to return value to its shareholders with its strong cash generation capabilities.

However, elevated operating expenses are major concerns for T. Rowe Price, with costs escalating witnessing a four-year (2018-2021) CAGR of 9.6%. It saw a downtrend in the first half of 2022. However, the company incurs significant expenditure to attract investment advisory clients and additional investments from existing clients. This might inflate expenses in the near term and hinder its bottom-line expansion.

Investment advisory fees are the biggest source of revenues for T. Rowe Price and the dependence on the fees could affect the company's financials in the near term, as the changes in AUM, owing to market fluctuations and foreign exchange translations, regulatory changes or a sudden slowdown in overall business activities, could hurt this revenue source.

Also, the company expects to continue seeing net outflows amid an unfavorable equity environment, high overall market volatility and challenged investment performance across flagship growth strategies.

Lastly, the majority of the assets under T. Rowe Price's purview are invested in U.S. equities. This product category has been most susceptible to market-share losses due to the heightened adoption of passive investments via index funds and exchange-traded funds.

Other asset managers seeing a similar rise in expenses are Franklin Resources, Inc. BEN and Artisan Partners Asset Management Inc. APAM.

Artisan Partners’ operating expenses have been exhibiting an uptrend for the past few years. It witnessed a four-year CAGR of 9.5% in 2021. The rise was primarily attributable to increased incentive compensation and third-party distribution expenses. APAM continued to see an increasing trend in the first half of 2022.

Franklin’sexpenses witnessed a CAGR of 16.2% over the last four years (ended fiscal 2021). Although The company has achieved 100% run-rate cost synergies of $300 million from the Legg Mason acquisition in the first quarter of fiscal 2022, the metric remained flat in the first nine months of fiscal 2022. Leveraging technological advancements might result in cost upsurges in the upcoming period.


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