T. Rowe Price Stock Is Soaring on the News of a $1 Billion Investment From Goldman Sachs. But Is It a Buy?

Key Points

• Baltimore-based T. Rowe Price is partnering with Wall Street giant Goldman Sachs.

• Goldman is making a huge $1 billion investment in shares of the asset manager.

• That's doesn't actually change much about T. Rowe Price's corporate goals.

• 10 stocks we like better than T. Rowe Price Group ›

Investors often get excited about corporate news stories, especially when they come along with big numbers like $1 billion. That's how much of T. Rowe Price's (NASDAQ: TROW) stock Goldman Sachs (NYSE: GS) is going to buy as the two financial giants look to partner up.

So, should you buy T. Rowe Price stock along with Goldman? Maybe, but not for the reasons you may think.

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What's the Goldman deal all about?

On Sept. 4, T. Rowe Price announced that it was creating a "strategic partnership" with Goldman Sachs "aimed at delivering a range of diversified public and private market solutions designed for the unique needs of retirement and wealth investors." That's not a very specific description, but it actually follows along with what T. Rowe Price has been doing with its business for years now.

The key statement from the news release is this: "A central focus is on providing a range of wealth and retirement offerings that incorporate access to private markets for individuals, financial advisors, plan sponsors, and plan participants." T. Rowe Price's business as an asset manager has long been centered on offering mutual funds to clients. That business has been under pressure from alternatives like exchange-traded funds (ETFs).

Assets under management, which is the key metric to watch for T. Rowe Price, has been under pressure as customers have shifted toward lower-cost ETFs. Since its top and bottom lines are determined by the fees it can charge on the assets it manages, this is a big long-term problem to deal for the asset manager. T. Rowe Price has been working on its own ETFs, but it has also focused on areas of the asset management business where there are growth opportunities. One such area is private market investments.

From this perspective, the Goldman deal is really nothing more than a strategic partnership. It allows T. Rowe Price to offer more in-demand products to its clients. And it gives Goldman Sachs more access to capital, for which it generates fees. A potential win/win if everything goes well.

But what about that billion-dollar investment?

Sometimes, when companies partner up, they seal the deal with an investment. That's what Goldman Sachs is doing here by acquiring $1 billion worth of T. Rowe Price shares. That's a big number, but it still only amounts to a 3.5% stake in T. Rowe Price. That's not enough to give Goldman Sachs any material say in how T. Rowe Price is operated. In fact, 3.5% will still leave Goldman Sachs well behind Vanguard, which owns nearly 12% of T. Rowe Price's stock.

Also notable is T. Rowe Price's balance sheet. The company has no long-term debt. It is, basically, in as strong a financial condition as a company can be in, from a financing point of view. It didn't need Goldman Sachs' investment. And, in fact, Goldman is buying the shares on the open market, so T. Rowe Price won't even see any of that cash anyway.

This is really just two big financial firms partnering up in an effort to provide customers with attractive products. Is it good news for T. Rowe Price? Without a doubt. Does it materially change T. Rowe Price's long-term story? Not really. The company is simply trying, in a new way, to shift with the times. And given its low leverage, it has ample time to make the changes it needs.

Is T. Rowe Price a long-term buy?

At the end of the day, buying T. Rowe Price just because Goldman Sachs is buying $1 billion worth of the company's stock is probably not a great call. The story is so much bigger than just that one fact.

The real reason to buy T. Rowe Price, which happens to have a historically high dividend yield of 4.8% today, is because you believe this well-financed and well-respected asset manager is going to be able to update its business with the changes taking shape in the broader finance sector. The Goldman Sachs partnership is, really, just additional evidence that it is making progress on that goal.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group and T. Rowe Price Group. The Motley Fool has a disclosure policy.