On January 8th I initiated a position in Aqua America (WTR), a water utility headquartered in Bryn Mawr, Pennsylvania. This stock has been on my radar for a few years now since I first looked into water related companies due to my interest in desalination. While not a desalination leader, Aqua America stands out as a reliable dividend payer with an established growth strategy. I bought $500 worth of shares through my Computershare Dividend Reinvestment Plan (DRIP) account and I'll be dripping $100 monthly into the stock and reinvesting the dividends to build my position for at least the next 12 months. This is the second stock purchase I've made in 2014 on a path to my goal of seven new positions for the year.
Aqua America services an estimated 3 million customers concentrated in eight states providing water and waste-water services. Pennsylvania makes up approximately 55% of revenues. Other states include Ohio, North Carolina, Illinois, Texas, New Jersey, Indiana and Virginia. Prior to 2004, the company was known as Philadelphia Suburban Corporation, formed in 1968. According to their website, the history of the company dates back to a group of Swarthmore College Professors in 1886.
Aqua America instituted a growth by acquisition strategy in the early 1990's whereby it buys small, under-capitalized water facilities and brings them under management and lowers operating costs. The company completed 18 acquisitions in 2012 and 15 acquisitions in 2013.
In a more exciting aspect of business expansion, Aqua America formed a joint venture in 2012 to build a pipeline in North Central Pennsylvania to supply water to natural gas producers drilling in the Marcellus Shale. I find the new line of business to be a welcome revenue booster and a potential growth market for this otherwise regulated utility. The drilling technique known as fracking consumes more water than traditional natural gas drilling which resulted in Aqua America getting involved. This past year I have been casually looking for investments levered to the Marcellus Shale because it represents a long-term growth opportunity. While this is not a direct play, hopefully Aqua America can find other ventures to assist in natural gas extraction and further boost this emerging part of their business.
Aqua America pays a current annual dividend of $.61, yielding about 2.5% at the 01/31/14 closing price of $23.95 per share. The company is a Dividend Contender having increased its dividend for the past 22 years. The 5-year dividend growth rate for WTR is 7.4% and its 10-year dividend growth rate is 7.9%. The most recent dividend increase was 9% declared this past October 16th. As of the latest quarter, trailing 12-month EPS was $1.27 giving the company a dividend payout ratio of 48%.
I chose the Aqua America DRIP for this position instead of buying the stock in my regular brokerage account. As a low beta utility, I am less concerned about buying on a dip because the short-term price decreases are generally not very deep. In addition, my existing Computershare account provides easy access to new positions for this and many other companies. Through the program, Aqua America charges no fees for new purchases or dividend reinvestment. As long as that policy does not change, I will pay no trading or administration fees on this holding unless I sell.
Why Invest in this Utility Now?
If you read my previous post Developing a Game Plan Using Sector Weighting, you'll know that upon analyzing the sectors in my portfolio, I was underweight Services and Utility companies. Utilities are well-known for their steady dividend payments and strong yields. Many utilities also have a built in monopoly and wide economic moat due to being the only service providers in certain geographic locations. Consequently however, they face greater regulatory scrutiny.
A number of utility companies continue to be on my watch list including Consolidated Edison (ED), Dominion Resources (D), WGL Holdings (WGL), PPL Corporation (PPL), Duke Energy (DUK), and Southern Company (SO). I chose WTR over these other utilities for a few reasons. First, being a Pennsylvania native and resident of Virginia, I am familiar with the markets the company serves. As a natural habit of investment research, I tend to look at the selection of locally based businesses when researching various industries. I'd rather invest in a utility nearby instead of one based in California, like American States Water (AWR). I don't follow this strategy as a rule, but it does factor into my consideration. See my previous blog post Buy Stocks Like You Buy Your Cantaloupes for more on buying locally.
Second, at my entry price of $23, the stock was off 18% from its 52 week high of $28.12 and trading below its 50 and 200-day moving averages. The electric utilities are currently trading nearer to their 52 week highs compared to water and gas.
Thirdly, water utilities will always have maintenance expenditures, but sourcing and treating water and wastewater should not be met with disruptive technologies in the foreseeable future. That I believe makes it a lower risk investment compared to electric utilities which are facing disruptive technological advances and the accompanied expenses. The greater risks for water utilities include drought, storm damage, and contamination as seen in the recent chemical spill in West Virginia.
Aqua America has a low beta of 0.35 and operates in a slow, steady and boring industry. While I'll be dollar cost averaging into the stock, I still appreciate the low volatility compared to existing positions in my portfolio. Here are some additional numbers:
Aqua America is not at a bargain price given the above numbers, but the high profit margin of 30%, wide economic moat, and long history of dividend increases I believe warrants the PE. If there is a significant decrease in price, the DRIP allows me to take advantage of the downturn by investing at regular intervals.
A recent Investor Presentation dated 12/11/2013 is available via the Aqua America Investor Relations website. If you are an interested investor, I encourage you to go through it for some general information and detailed comparisons to its competitors.
WTR is scheduled to announce Q4 earnings on February 24th. The current consensus estimate is $.25/share compared to $.19/share for the same quarter last year, a 31.6% expected increase.
The stocks I buy in my taxable accounts are meant to generate yearly dividend income which will grow through dividend increases over time. Each position I open in these accounts, I plan to hold onto at least until I turn 59 ½. That is when I can access my retirement savings accounts without penalty or added tax consequences. Since I plan to retire at age 55, I'll need dividend and other investment income to fund the 4 ½ years prior to age 59 ½. Should the situation of a company in my portfolio change, namely a cut to the dividend or slumping growth, I'll consider selling before my retirement date.
Given my retirement strategy and current portfolio, Aqua America fills my utility sector void while showcasing the hallmarks of a great dividend growth stock. It is a relatively low-risk company with a multi-pronged growth strategy, trading at a reasonable valuation, and management appears dedicated to rewarding patient shareholders with a consistent and increasing dividend payment. To view this stock and the rest of my portfolio, visit the Investment Income page on my website.
Data Sources: Yahoo Finance, dripinvesting.org
Disclosure: Long WTR