The following is our latest Fund Analyst Report for T. Rowe Price Dividend Growth I PDGIX
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T. Rowe Price Dividend Growth's longtime manager and strategic approach support its Morningstar Analyst Rating of Silver across all share classes.
Tom Huber has run the strategy since March 2000, landing him among the large-blend Morningstar Category's top decile of longest-tenured managers. Huber utilizes T. Rowe Price's first-rate global analyst team and works with an investment advisory committee that provides guidance on theses.
Huber believes dividend growers offer outperformance with lower volatility. He focuses on dividend-paying firms that are financially healthy enough to sustain above-average payout growth. He looks for companies with durable competitive advantages, ample cash flow, and sound management teams that allocate capital with shareholders' interests in mind, whether that's through dividends or buybacks.
Huber, a believer in mean-reversion, is a patient investor as he waits for his investment theses to play out. Huber identifies portfolio candidates with a three-year outlook in mind, but often holds stocks much longer than that. For example, top holding Microsoft MSFT has been a mainstay since he started.
The portfolio is diversified across more than 100 holdings and has broad sector exposure, albeit with some preferences. For instance, Huber has shied away from the energy sector, a good call in recent years as the sector has underperformed. The fund is also typically light on tech and communication-services names versus its S&P 500 benchmark. This diversified nature and tendency to avoid more speculative names in favor of dividend growers has led to a muted risk profile.
The fund has served its long-term investors well. From Huber's early 2000 start through May 2020, the no-load shares' 7.5% annualized gain beat the S&P 500's 5.6%, thanks to superior downside protection. It also edged the Nasdaq US Dividend Achievers Select Index since that benchmark's 2006 inception, thanks to better participation in up markets. Aided by strong downside protection, it remains a solid option.
Process | Above Average Consistent execution helps the fund earn an Above Average Process rating. True to its name, this fund focuses on companies that are financially healthy enough to increase their dividends over time. As a result, manager Huber favors firms that generate high levels of free cash flow, an attribute that's buoyed the fund (in relative terms) during market pullbacks. He maintains a dividend-growth rate that on average is about 250 basis points higher than that of the S&P 500.
While Huber's focus is on dividend growth, he is cognizant of dividend yield when looking at the overall portfolio, targeting a 200- to 250-basis-point yield. This leads the fund to hold stocks with a range of yields. For example, Huber likes low-yielding longtime holding Roper Technologies ROP, for instance, because its management team has done a good job of reinvesting in the businesses and making smart, shareholder-friendly acquisitions. Along the same lines, Huber won't hold a large position in a stock simply because of its yield and trims names as their prices appreciate.
In times of uncertainty, Huber's emphasis on nonyield characteristics, including valuation, balance-sheet strength, and management has provided diversification. While this reduces total yield, Huber believes this helps the portfolio participate more in the upside and has made the fund less volatile than its typical large-blend peer.
Huber constructs a diversified portfolio of 100-120 stocks, with an emphasis on large, competitively advantaged firms that can grow dividends. As of May 2020, over 90% of the portfolio's assets were held by stocks with wide or narrow economic moats, according to Morningstar equity research.
Although Huber's focus on reasonably priced dividend-paying stocks gives the fund a value bent, his preference for market leaders with high returns on equity and returns on capital has edged the fund closer to the growth side of the Morningstar Style Box in recent years. That's kept it in the large-blend category during his tenure.
Sector weightings don't stray too far from the S&P 500, though the fund typically has been underweight information technology and communication services. In recent years, the fund has been underweight in energy, as Huber finds it harder in commodity-driven sectors to find good companies that can sustain earnings and cash flow growth. Meanwhile, it has held larger healthcare, industrials, and financials stakes than the benchmark.
Huber keeps the fund's turnover low, normally ranging from 10% to 20% in a given year. Cash has been hovering around 5% of assets recently, but Huber did deploy some capital in 2020's first quarter as the market dropped, reducing cash to 4% of assets.
People | Above Average This strategy benefits from a manager with a long, successful tenure and strong supporting resources. It receives an Above Average People rating.
Huber has over 25 years of investment experience, all but one with T. Rowe Price. He joined the firm in 1994 as an analyst, covering various consumer companies ranging from retailers to leisure to gaming. After contributing to various funds for several years, he took over managing this fund in March 2000. He also put up competitive risk-adjusted results at T. Rowe Price Growth & Income PRGIX from 2007 until mid-2015, when another manager took over.
Huber has access to T. Rowe Price's well-regarded global analyst team. It numbers more than 100 and supports over 15 equity strategies with Morningstar Analyst Ratings of Silver or Gold. As with any team of this size, there has been turnover, but the firm has managed through these changes well. Huber's experience also helps compensate for any holes in coverage that result from fluctuations on the analyst team.
Huber has other resources besides the firm's analyst team. He works with an investment advisory committee that oversees the fund on a high level. He also regularly meets with a handful of large-blend-focused portfolio managers at T. Rowe Price to discuss overlapping holdings.
Huber invests more than $1 million in the fund.
Parent | High T. Rowe Price remains well-positioned in an increasingly competitive industry, earning a High Parent rating. It has withstood the headwinds facing active managers with its rigorous research process, strong performance across asset classes, and continued investment in its research team. Head count grew 9% in 2019, and T. Rowe's debt-free balance sheet gives it flexibility to keep hiring amid an economic slowdown, as it did in past downturns. A build-out of its multi-asset team in recent years supported enhancements to its prized target-date suite in 2020, and the firm has bolstered its quantitative capabilities for internal and external use. While T. Rowe typically home-grows its talent, it has made several experienced equity analyst hires in key sectors lately. This strengthened analyst bench has allowed the firm to capably handle expected manager retirements with its characteristically smooth transitions as well as the rare surprise loss, such as when star manager Henry Ellenbogen left to start his own firm in 2019.
T. Rowe is evolving from a business standpoint. It’s broadening distribution outside the U.S., expanding its ESG capabilities, and planning for semitransparent exchange-traded funds, expected in late 2020. Yet it brings a measured, thoughtful approach to strategy launches and capacity management, with fundholders’ interests at the forefront.
Performance Huber has delivered below-average volatility and strong risk-adjusted performance during his tenure.
The fund's focus on companies that are financially healthy enough to pay a dividend--and potentially increase it over time--has led to a portfolio that's been resilient in down markets. Indeed, it fared better than the S&P 500 and most large-blend peers in the early-2000s bear market, the late-2007 to early-2009 financial crisis, the 2011 market pullback, and the late-2018 near bear market. In 2020's market pullback between Feb. 19 and March 23, the fund's 32.9% loss was 60 basis points better than the S&P 500's.
The trade-off is that the fund can look sluggish in rising markets like 2009, 2010, 2012, and 2013; it landed in the category's bottom half all four years. That hasn't dented its long-term record, though. Since Huber's April 2000 start, the no-load shares' 7.5% annualized gain through May 2020 beat the S&P 500's 5.6% and the category norm's 4.4%. What's more, the fund has been consistent: Its rolling five-year returns under Huber beat the category average 86% of the time and have rarely landed in the bottom third.
The fund's returns through May 2020 slightly edged the Nasdaq US Dividend Achievers Select Index, which has only been around since 2006. During Huber's tenure, the fund is in the category's top decile.
Price It's critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its category's second-cheapest quintile. Based on our assessment of the fund's People, Process and Parent pillars in the context of these fees, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Silver.