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Summary

  • Middlesex Water is a water utility company in the northeast with a dividend yield of 3.75%.
  • The company has raised dividends for 41 consecutive years.
  • Revenue, net income, EPS, return on equity, and O&M efficiency have all improved annually since 2011.

Middlesex Water Company (NASDAQ:MSEX) was established in 1897 and provides regulated and non-regulated water, wastewater utility and related services in parts of New Jersey, Delaware and Pennsylvania. Middlesex Water engages in collecting, treating, distributing and selling water for domestic, commercial, municipal industrial and fire protection purposes. The company also operates water and wastewater systems under contract on behalf of municipal and private clients in New Jersey and Delaware. The Middlesex System in New Jersey provides water services to approximately 60,000 retail customers, primarily in eastern Middlesex County, New Jersey and provides water under wholesale contracts to the City of Rahway, Township of Edison, the Boroughs of Highland Park, the Township of Marlboro and the Old Bridge Municipal Utilities Authority. Middlesex Water family of companies (Tidewater, Pinelands, Bayview, Twin Lakes, Utility Service Affiliates - Perth Amboy, and White Marsh Environmental Systems) services over 70,000 customers. Middlesex Water is one of 8 publicly-traded water utility companies in the United States. The company has paid regular dividends since 1912 and has increased dividends for 41 consecutive years, making the company a dividend aristocrat.

Source: Middlesex 2014 Shareholder Meeting

Middlesex Water vs. Peers

Water Utility

Market Cap ($B)

P/E

EV/EBITDA

Return on Equity

Debt/Equity

Payout Ratio

Dividend Yield

Consecutive Years of Dividend Increases

Middlesex Water Co.

$0.32

19.6

11.1

8.8%

0.85

68%

3.75%

41 Years

American Water Works Co. (NYSE:AWK)

$8.89

23.5

10.6

8.2%

1.22

51%

2.50%

5 Years

American States Water (NYSE:AWR)

$1.23

20.5

9.76

12.2%

0.67

59%

2.70%

59 Years

Artesian Resources (NASDAQ:ARTNA)

$0.18

21.5

10.8

6.7%

0.95

74%

4.00%

5 Years

Aqua America (NYSE:WTR)

$4.33

19.8

13.8

13.8%

1.03

55%

2.40%

6 Years

California Water Services Group (NYSE:CWT)

$1.14

26.6

10.9

7.9%

0.85

76%

2.70%

46 Years

Connecticut Water Services (NASDAQ:CTWS)

$0.36

19.3

12.6

11.1%

0.86

53%

3.10%

44 Years

SJW Corp. (NYSE:SJW)

$0.53

24.6

10.45

6.7%

1.2

54%

2.80%

48 Years

Industry Average

$2.12

21.9

11.3

9.4%

0.95

61%

2.99%

32 Years

Source: Yahoo Financials and Dividend.com

Middlesex Water's fundamentals are right in line with the water utility industry. The company has the second lowest P/E in the group and the second highest dividend yield at 3.75%. What stands out the most when looking at this comparison is the number of consecutive years these water utility companies have increased dividends. 5 of the 8 publicly-traded water utility companies qualify as dividend aristocrats. A dividend aristocrat is any company that has raised dividends for at least 25 consecutive years. The water utility industry alone has an average of 32 years. Middlesex has paid regular dividends for 102 straight years and has increased dividends for 41 consecutive years.

Regulated water utilities operate under set pricing that has been agreed upon by the company and the city or municipality they serve. Due to this agreement, water utilities have a very good idea what their revenues will be on a quarterly basis and will adjust their operating and maintenance expenses accordingly. This results in predictable cash flow that makes rewarding shareholders through dividends an easy task. Middlesex Water has done a particularly good job at managing expenses and improving margins over the past three years.

Financial Growth

Over the past three years, Middlesex Water has improved upon virtually every financial measurement available. Revenue, net income, EPS, return on equity, dividend payment and operating and maintenance expenses have all improved every year since 2011. Management takes a calculated and measured approach on growing the business through smart organic growth and reasonable acquisitions. Because 90% of revenue comes from regulated rates, Middlesex will never have explosive revenue growth. However, this is also why water utilities perform well during times of economic weakness.

 

2011

2012

2013

Revenue ($M)

$ 102.1

$ 110.4

$ 114.8

Net Income ($M)

$ 13.4

$ 14.4

$ 16.6

EPS

$ 0.84

$ 0.90

$ 1.03

Return on Equity

7.6%

8.0%

8.9%

O&M Efficiency

44.6%

45.2%

47.1%

Dividend (Annual)

$ 0.734

$ 0.743

$ 0.754

Revenue growth has slowed over the first six months of 2014 due to the loss of the Borough of Sayreville as a wholesale customer. Middlesex Water delivered wholesale water at the interconnection for the Borough of Sayreville and they in turned delivered the water to their customers. However, Sayreville opted to build a multi-million dollar water treatment system, thereby eliminating the need for wholesale water from Middlesex. This decrease in revenue was offset by increased customer demand, increased fees for new customer connections and the February 2014 interim base rate increase of 6.5% in Tidewater. More importantly, Middlesex was able to decrease operating costs during the first half of 2014, which included one of the worst winters the Northeast has seen in years. By tightly controlling costs, the company still managed a 3.1% increase in net income with flat revenue growth.

 

Six months ended June 30,

 

($ Thousands)

2014

2013

Y/Y % change

Revenue

$ 56,363

$ 56,140

0.4%

Operating Expenses

$ 41,649

$ 42,104

-1.1%

Operating Income

$ 14,714

$ 14,036

4.8%

Net Income

$ 7,897

$ 7,658

3.1%

EPS (diluted)

$ 0.49

$ 0.47

4.3%

Second Half 2014 Growth

The second half of 2014 should see increased revenue growth due to a couple of main factors. On June 18, 2014, the company announced a favorable approval of water rates by the New Jersey board of public utilities. The board approved a base water rate increase of $4.2 million to its customers located in central New Jersey. The rates went into effect on July 20 and reflect an overall revenue increase of approximately 6.34%. Middlesex has invested over $11 million since its last rate filing in January 2010 and the new rates are designed to allow for a 6.72% return on invested capital in rate base of $208.5 million. The return on equity portion of the rate was set at 9.75%. In 2013, the company had an 8.9% return on equity, so this increase will benefit the company over the next 12-18 months. Perhaps most importantly of all is the timing of the rate increase. The July 20 effective date allows the company to realize higher rates during the third quarter, which is typically when water consumption is at its highest. New Jersey regulated water service accounts for roughly 60% of revenue.

In late 2013, Middlesex Water also won a 50-year contract with the Department of Defense to privatise the water systems at Dover Air Force Base. Tidewater, a Middlesex subsidiary, will provide DAFB with potable water service and own and maintain all water utility assets. The contract will operate as a regulated water utility in Delaware and is expected to produce over $700,000 in revenue annually. Tidewater will assume full control and operations of the DAFB contract in October 2014. Since Tidewater is assuming control of water utility assets already in place, the contract should begin to be accretive to earnings immediately. This marks Middlesex Water's entry into the military base water system privatization. The company is also pursuing several other opportunities at military bases and has several proposals in various stages of review by the Department of Defense.

Cost Savings

As I've mentioned before, Middlesex Water has done a tremendous job of reducing costs. From 2011 to 2013, the operating and maintenance efficiency ratio improved from 44.6% to 47.1%. Through the first six months of 2014, the ratio has improved 1.2% over the same time period in 2013. While these numbers may seem small and insignificant, in the world of regulated utilities, cost savings and efficiency are what drives profits and lead to successful companies. The company has taken aggressive measures to curb the costs of their defined benefit plan and as a result saved roughly $2.6 million in defined benefit costs in 2013.

Defensive Position

MSEX Chart

MSEX data by YCharts

Because water use varies very little during market weakness, Middlesex is a defensive dividend stock that has very good downside protection. During the recession in 2008-2009, the company far outperformed the S&P 500. Even more impressive is the company's ability to increase dividends in any economic environment. Having increased dividends for 41 consecutive years, means there has not been a development so significant since 1973 that could cause a disruption to the dividend. Dividend powerhouses such as, Consolidated Edison (NYSE:ED), Wal-Mart (NYSE:WMT), Exxon (NYSE:XOM), AT&T (NYSE:T), Clorox (NYSE:CLX), and Walgreens (NYSE:WAG) don't have the dividend track record that Middlesex Water has achieved.

(click to enlarge)

Source: Middlesex 2014 Shareholder Meeting

Conclusion

Middlesex Water is a little-known dividend aristocrat that can add value to any portfolio. The combination of dividend yield (3.75%), stability, downside protection and solid fundamentals make this company an off the radar pick for investors looking to get defensive as the market reaches all-time highs. The company has several growth factors in the back half of 2014 that will lead to moderate revenue growth and a cost conscious management that will continue to deliver improved margins. Comparing Middlesex Water's fundamentals to industry peers again holds a favorable analysis as it is right in line with competitors and has one of the highest dividend yields in the entire industry.

Source: Middlesex Water: A Little-Known Dividend Aristocrat