It is easy to get caught up in the fear that usually accompanies a bear market. If you step back and think about the long term, however, you can usually find some pretty compelling investment opportunities while others in the market are being irrationally negative. Passive income all-stars Franklin Resources(NYSE: BEN) and T. Rowe Price(NASDAQ: TROW) look like two such gems today -- if you can get past the fact that a bear market is terrible for their asset management businesses. Here's what you need to know.
Focus on the dividend
Before discussing anything else, it pays to look at just how reliable Franklin Resources and T. Rowe Price have been for dividend investors. While both are Dividend Aristocrats, they have each boosted their payouts annually for longer than that designation's 25-year minimum. Franklin Resources has increased its dividend annually for 42 years. T. Rowe Price trails a little behind at 36 years.
Those are impressive track records, but it pays to put them into a larger perspective. There have been multiple bear markets over the past three and a half decades. There have been several recessions as well. In fact, one was so bad that it was nicknamed the Great Recession. There were very real fears during that 2007-2009 downturn that the global financial system would seize up and fail. And still, Franklin Resources and T. Rowe Price continued right along with the dividend hikes.
This shows a massive commitment to shareholders that shouldn't be ignored. In fact, it suggests that bear markets should probably be taken in stride by investors because the management teams at these two companies clearly know how to deal with market disruptions.
Bear markets are rough
The words "taken in stride" above are important because you shouldn't ignore the fact that bear markets are very bad for asset managers. Such businesses generally rely on fees driven by the assets they have under their control. During a market downturn, that money pool will shrink, leading to reduced fee income. And scared investors often pull money out of the market, further reducing fee income. This is one of the key reasons why the S&P 500 is down around 17% from its highs over the past year but T. Rowe Price is lower by a massive 47% and Franklin Resources has fallen 33%.
Expect weak performance at both of these industry-leading names for as long as the bear market lasts. To put some numbers on this, Franklin Resources' assets under management fell by about $200 billion between the start of 2022 and the end of June. T. Rowe Price, meanwhile, witnessed a drop of more than $300 billion. Although the fees these companies charge are usually relatively small percentage-wise, when you are talking about hundreds of billions of dollars, the lost revenue really starts to add up.
This, too, shall pass
Every bear market in stock market history has been followed by a bull market, and vice versa. One, essentially, sets the stage for the other. So while the news is bad today, it is highly likely that things will, eventually, turn brighter in the future. That will increase the value of the assets T. Rowe Price and Franklin Resources oversee and bring in new cash from investors -- at least, that's what has happened historically. Assuming the long-term trends remain roughly similar, these two longtime dividend payers should see their financial results and share prices rebound at that point.
In the meantime, however, don't be surprised if the companies use the downturn to buy smaller competitors. Franklin Resources, in fact, completed two acquisitions in early 2022 and recently announced a third. This particular company has a long history of acquisition-driven growth, so this is a core approach. T. Rowe Price is less aggressive on this front, but its acquisitions are still worth watching. For example, it completed a deal at the end of 2021. Indeed, they may both come out of this bear market better-positioned companies than when they entered.
Don't pass up these passive income giants
If you can stomach going against the grain, Franklin Resources and T. Rowe Price are both worth a close look today for investors seeking finance exposure. Yes, the stocks are getting beaten up. Yes, performance is going to be weak in a bear market. But these asset managers have proven they can handle such periods in stride and come out the other side stronger. That's exactly the type of stock long-term dividend investors should want in their portfolios. Plus, Franklin Resources' dividend yield is around 4.5% today, while T. Rowe Price's dividend yield is about 4.1%.
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