T. Rowe Price's Dividend Offers Upside Even With Shares Now Fully Priced

T. Rowe Price Group (NASDAQ:TROW) is one of theconsensus rating is neutral and the consensus 12-month price target is 3.97% below the current share price.

Source: Investing.com

The consensus outlook from the Wall Street analysts is neutral, with price targets that imply that the next year’s growth is already priced into the shares. Back in late March, the 12-month price targets suggested that the shares had no upside, as well, but the shares have rallied since then. The market, in other words, appears to be viewing TROW in a more optimistic light than the analysts.

Market-Implied Outlook for TROW/h2

Even though TROW has a market cap of almost $50 billion, the options trading on the shares is fairly thin. This means that the market-implied outlook may be less reflective of actual market sentiment. I have analyzed options on TROW that expire on Jan. 21, 2022 to generate the market-implied outlook for the next 2.45 months (from now until that expiration date). I have also calculated the market-implied outlook for the next 5.2 months from the prices of options that expire on Apr. 14, 2022. The trading in options for this later expiration date is especially light, so I give little weight to this longer outlook.

The standard presentation of the market-implied outlook is in the form of a probability distribution of price returns, with probability on the vertical axis and return on the horizontal.

Source: Author’s calculations using options quotes from E-Trade

The market-implied outlook for TROW to mid January of 2022 is generally symmetric, with comparable probabilities of positive and negative returns of the same magnitude, although the maximum probability outcomes are slightly tilted towards negative returns. The peak probability corresponds to a price return of -0.9%. The annualized volatility derived from this distribution is 26.8%.

To make it easier to directly compare the probabilities of positive and negative returns, I rotate the negative return side of the distribution about the vertical axis (see chart below).

Source: Author’s calculations using options quotes from E-Trade. The negative return side of the distribution has been rotated about the vertical axis.

This view of the market-implied outlook shows that the probabilities of positive returns are consistently higher than for negative returns across a wide range of the most-probable outcomes (the solid blue line is above the dashed red line for almost all of the possible returns on the chart). This is a bullish indication for TROW.

Theory suggests that the market-implied outlook is expected to have a negative bias because investors, in aggregate, are risk averse and tend to over-pay for put options. Considering the potential for this bias reinforces the bullish interpretation of the market-implied outlook for TROW.

The market-implied outlook for the next 5.2 months, from now until Apr. 14, 2022, is generally consistent with the shorter-term outlook although the peak in probability at a small negative return is more pronounced (return of -3.5%) and the tilt towards positive returns for the range of other outcomes is less pronounced. As noted previously, I have little confidence in this outlook due to the lack of active trading in options with this expiration. I interpret this outlook as neutral.

Source: Author’s calculations using options quotes from E-Trade. The negative return side of the distribution has been rotated about the vertical axis.

Summary/h2

TROW has delivered impressive returns so far this year, and since my last analysis in March. The asset management business thrives when markets rally, of course (and vice versa). The Wall Street consensus back in March was that the shares were fully priced and the same is true today. The fundamentals are attractive and there is no obvious impediment to the company maintaining its long-term dividend growth trajectory.

While the Wall Street consensus price target for the next year is below the current price, the dividend yield and expected (continued) dividend growth rate can reasonably support a 15% total annualized return. The market-implied outlook to early 2022 continues to be slightly bullish, albeit less bullish than the market-implied outlook for the balance of 2021 that I calculated in late March. I am maintaining my bullish overall rating for TROW.

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Written By: Geoff Considine, Ph.D