This 4.6% yielding finance stock has raised its dividend through the last 4 recessions

Recessions can be scary and have real-world consequences for jobs and the stock market. However, they are part of life as a long-term investor. Recessions can threaten weak companies that lack the fundamental strength to survive economic downturns.

How do you know a business can survive tough times? Dividends are a great litmus test. Look for companies that can share their earnings with investors and continue to increase this payment through recessions. The US economy has gone into recession four times since 1990.

Investment management company T. Rowe Price (NASDAQ: TROW) it has raised its dividend in all four recessions, as well as every year for the last 38 years. Here’s the secret behind T. Rowe Price’s longevity and why it could be a great buy for any long-term investor today.

A business built on markets

Financial markets are the primary avenue for building wealth in the modern world, but most people do not have the time, desire or education to manage all of their investments independently. Investment management companies such as T. Rowe Price sell various financial products such as mutual funds, provide consulting services to clients, and operate retirement plans for employers. T. Rowe Price primarily generates revenue by charging fees on the $1.6 trillion in collective assets it manages.

T. Rowe Price’s assets under management (AUM) grow when clients invest more money in its products and services or when the assets themselves appreciate. The US stock market continues to rise over the long term, which helps T. Rowe Price’s business grow. However, it also makes the company susceptible to a market crash, as asset prices fall and spooked clients might pull their funds out of the markets.

You can see the occasional dip during recessions (2001, 2008, 2020), but the long-term trend is upward:

Iron finances support generous shareholder returns

T. Rowe Price gushes cash profits; the company has few expenses other than employees, which means that management can be very generous with shareholders. The company has exceeded annual dividend increases and paid special dividends twice in the past decade. These are one-time dividends and usually much larger amounts than typical payouts. During that time, T. Rowe Price repurchased 15% of its total shares, which helped boost the stock price by boosting earnings per share.

Most importantly, management can do this without sacrificing the financial health of the company. Today, T. Rowe Price has $2.7 billion in cash and zero debt. When the next recession comes, management can supplement any drop in its profits with the money it already has.

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Why T. Rowe Price is a buy today

One risk T. Rowe Price faces is that investors have increasingly moved to passive mutual funds over the past decade. T. Rowe Price specializes in actively managed funds that charge higher fees than a passive fund that might track a market index and charge investors less. This year, total assets in passive investments exceeded assets for the first time, which could hamper T. Rowe Price’s long-term growth.

That said, the stock appears to be priced appropriately for that risk. The stock trades today at a forward P/E ratio of 12, below its 10-year average of 15. Analysts believe T. Rowe Price will continue to grow earnings by nearly 7% annually over the long term. Again, the stock’s valuation is quite reasonable for that expected growth. Even if the stock’s valuation remains the same, investors could still see total annual returns of around 11%, as the dividend yield is 4.6% today.

T. Rowe’s price may not touch growth, and investors are getting a high-yielding dividend stock that will likely continue to grow its payouts. This is a solid worst case scenario. On the other hand, the stock could outperform the market if the business delivers as expected. This win-in-the-front-of-the-tail-next-to-the-back investment scenario makes the stock a buy today.

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool recommends T. Rowe Price Group. The Motley Fool has a disclosure policy.

This 4.6% Yield Financial Stock Has Raised Its Dividend in the Last 4 Recessions was originally published by The Motley Fool