New Buy: American States Water Company

May.26.14 | About: American States (AWR)

As mentioned yet again in May's edition of the Income Surfer Newsletter, I anticipate a substantial correction in global equity markets. So far Mr. Market hasn't obliged such calls, but one day he will. Still, an investor can't wait forever to put capital to work. What is an investor to do?!

We have continued to maintain a very high level of cash in our portfolios. Cash is the ballast in our portfolio. Historically I would have said that bonds, utility stocks, or consumer staples stocks would have provided that ballast... but, given the very high prices of those assets (and correspondingly low yields) I see little reason to invest fresh capital at present. With cash continuing to pour in from dividends, we have been letting that capital accumulate. This week however, we purchased our first long term investment since the last week of January, when we bought American States Water Company (NYSE:AWR). The purchase was made last week, at a shade over $28.

American States Water Company has been a consistent performer for decades. It sports a 50+ year record of raising dividends annually, and this trend should continue given the current dividend payout ratio of 50%. Return on Equity, operating margins, and the debt load are all about where I'd expect for the industry. There are few industries more predictable than regulated utilities.

Additionally, I predict massive water shortages for the American west, in the coming decades. This company, and others like it, should be well positioned to benefit from those shortages. As you may have guessed, this investment wasn't about "shooting the lights out". It was about investing in an asset that will outperform cash, while being minimally correlated to the broader equity markets. We needed to invest some capital somewhere, and we feel initiating this position will serve us well in the coming decades.

In the coming week or two, I also expect to be initiating a position in Aflac (NYSE:AFL). It will be a very small position because I feel prices are still very elevated, but Aflac's track record (and relative undervalue) has resulted in an initial price target of $60 for me. If only I'd researched them in 2009 or 2011 (at $25 or $30 respectfully). So it goes however. We are looking forward to deploy large amounts of cash when the correction finally arrives.

Disclosure: Author holds a position in AWR.