With droughts becoming more widespread over the last couple of years, an enormous amount of pressure has been placed on water utility companies to better manage their water resources. These companies, which provide water and waste water utility services to customers, have become an everyday necessity for most consumers. The economic climate in which we live has many things of which people are very uncertain. There is however one thing that I am certain of; people cannot live without water. It is for this reason that I believe every person seeking to build a solid income generating portfolio should own at least one water utility stock. Below I have highlighted some key data points for three water utility companies worth considering for your income portfolio and one you should avoid. Afterwards we will rank them based on total return over a four-year time period. All numbers compiled are based on the time period between Jan 2, 2009 and Jan 2, 2013.
It is important to note index returns for this same time period for accurate comparison. The DOW, NASDAQ, and S&P four-year returns are listed below. I have also listed the performance of the Dow Jones Utility Average Index so that we may compare these below utilities versus their peers.
- NASDAQ (1476 > 3019) 104%
- DOW (8086 > 13104) 62%
- S&P (825 > 1426) 72%
- Dow Jones Utility Average Index (DJU) (369.70 > 453.09) 22%
Aqua America Inc (WTR)
Current Dividend Yield: 2.4%
4 Year Non-Compounded Total Return: $8.93 (43%)
- 4 Year Dividend Payout: $2.44
- 4 Year Share Price Growth: $6.49
4 Year Dividend Growth Rate: 5.4%
4 Year EPS Growth: WTR has seen its earnings per share increase from $0.73 for the year end 2009 to $1.40 for the year end 2012.
Summary: As you can see WTR offers a return that is almost double that of its peers in the DJU. This company shows great EPS growth almost doubling EPS income in a four-year time frame. The 43% total return over the last 4 years places it close the DOW return over that same time frame. A dividend yield of 2.4 % and a dividend growth rate of 5.4 percent promises continued return on investment dollars.
American Water Works Co (AWK)
Current Dividend Yield: 2.5%
4 Year Non-Compounded Total Return: $20.89 (98%)
- 4 Year Dividend Payout: $3.79
- 4 Year Share Price Growth: $17.10
4 Year Dividend Growth Rate: 4.2%
4 Year EPS Growth: AWK has seen its earnings per share increase from a loss of ($1.39) for the year end 2009 to a profit of $2.11 for the year end 2012.
Summary: As you can see AWK offers a return that is almost 5 times that of its peers in the DJU. This company shows excellent EPS growth over the last 4 years going from a loss ($1.39) to a profit of $2.11. The 98% total return over the last 4 years not only beats the DJU by a wide margin but it also beats the DOW and S&P indexes over this same time frame. AWK even verges on matching the growth centric NASDAQ index. A dividend yield of 2.5% and a dividend growth rate of 4.2% coupled with the amazing profitability growth of this company promises impressive returns over the coming years.
American States Water Co (AWR)
Current Dividend Yield: 2.7%
4 Year Non-Compounded Total Return: $20.40 (59%)
- 4 Year Dividend Payout: $4.42
- 4 Year Share Price Growth: $15.98
4 Year Dividend Growth Rate: 6.4%
4 Year EPS Growth: AWR has seen its earnings per share increase from $1.62 for the year end 2009 to $2.83 for the year end 2012
Summary: As you can see AWR offers a return that is almost triple that of its peers in the DJU. This company shows impressive EPS growth from $1.62 to $2.83 over the last 4 years. The 59% total return over the last 4 years rivals that of the DOW's return over that same time frame. AWR's dividend yield of 2.7% and dividend growth rate of 6.4% are the largest of the 3 mentioned utilities. Couple the dividend return with the EPS growth prospects and AWR is positioned well to return profit to investors over the coming years.
Word of Caution:
As you can see water utilities offer great returns versus their peers, but not every water utility can boast these types of gains. One such company listed below has seen its performance suffer because it operates in an area that is unfavorable to utility companies to operate. As you can see from the numbers below sometimes even the best company can suffer from locality. Please remember the old saying, location, location, location.
California Water Service Group (CWT)
Current Dividend Yield: 3.2%
4 Year Non-Compounded Total Return: $0.18 (00.8%)
- 4 Year Dividend Payout: $2.43
- 4 Year Share Price Growth: -($2.25)
4 Year Dividend Growth Rate: 1%
4 Year EPS Growth: CWT has seen its earnings per share increase from $0.98 for the year end 2009 to $1.17 for the year end 2012
NOTE: CWT executed a 2 for 1 share split in Jun 2011. All numbers have been reverse adjusted to account for that split.
Summary: As you can see even operating in a favorable sector does not always translate to profit. CWT has had a difficult time learning how to profit from the water utility model. It is clearly underperforming its peers in the DJU and does not even come close to matching any of the index returns over this same time. There may be brighter days ahead for this utility but I do not see it. My advice is to avoid investing in this company for the long haul because its returns are nothing to be envious of.
Summary: Water utilities have long been thought of as boring income only investment. Income investors seem to be the only people who are interested in owning these utilities. As you can see in the case of AWR and AWK, these companies should be looked at by more than income-seeking investors. AWK's performance even begins to rival that of the growth centric NASDAQ. This sector offers nice solid growing dividend returns but also offers nice growth prospects that a lot of utility companies seem to lack. Let us change the way we view these utility companies and start thinking about them for more than just income purposes. Please comment in the section below and let me know what you think.