In a world where disruptive technologies keep changing modern society, water remains a constant. Clean water is taken for granted by many citizens. To ensure safe water is available, there are water utilities, and these companies are worth considering for their investment potential. They generally have low betas and are typically bought for their dividends. When I was younger I thought water companies were boring. Today I like the fact that they are boring. One's age and one's desire for capital preservation can be dominant investment themes. After all, water infrastructure is required in all communities. Water is one core "must have" item for each and every family.
In this sector, I look at the debt levels which have a higher debt-to-equity percentage than other sectors. A closer review will identify what companies continue to grow their dividend and if asset allocation dollars are appropriate.
American States Water (AWR)
- Market Cap:$630-million
- Debt-to-Equity: 40%+
- Dividend Yield: 3.2%
- Service Location: primarily southern California
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AWR operates primarily in southern California. Due to the California budget difficulties, this geographic location is one I do not want to over emphasize in a portfolio. The dividend is growing at a less than ideal 2-3%. I am looking for a 5%-minimum dividend grower per annum. AWR did sell their Arizona subsidiary. The deal closed on May 31st. AWR does offer an old fashioned DRIP plan. My broker charges less than $2 per trade, so DRIPs don't necessarily interest me if they are too time consuming.
I had a dividend estimate projection for 10-years based upon 3% earnings and dividend growth. My findings indicate this clearly is one that lacks adequate dividend growth for my portfolio. My option would be to find a preferred stock or a bond versus a stagnant growing dividend.
American Water Works (AWK)
- Market Cap:$5.1-billion
- Debt-to-Equity: 57%
- Dividend Yield: 2.9%
- Service Location: 30 U.S. states
American Water Works has the largest market cap of the publicly traded water utility stocks. The equity has -- on first blush and a cursory review -- positive financial results. The data I am reviewing expects earnings and dividends to grow between 6-8%. For my calculations, I will assume a 6% growth in earnings and dividends. This should provide a conservative estimate on price projections.
Now we're talking! AWK, compared to peers, has a far more attractive projection for price and dividends. The calculations are versus a 10-year Treasury Bill with a yield of approximately 3%. Water infrastructure costs are a mandatory societal investment. As the largest public water utility, AWK likely will have preferential borrowing costs compared to smaller sized water utilities. This one is on my radar screen.
Aqua America (WTR)
- Market Cap:$3-billion
- Debt-to-Equity: 57%
- Dividend Yield: 2.7%
- Service Location: 3-million residents: Texas
Aqua America is a staple in my mindset of what a water utility is. The utility serves 3-million citizens that are spread out over a diverse geographical location. The 57% debt to equity, as with AWK, is a high number. I need to refocus and appreciate the fact that the number is typical in this industry. This is the water business after all. WTR continually adds to their vast utility customer base. The earnings and dividends increase is expected to be -- per analysts estimates -- a 5% increase. My focus is more on the dividend increase.
This name held its own over a very difficult period of time. The 2009 financial crisis was not a pretty picture by any means. Historically this name is a quality holding in my view, despite my dislike of a capital structure being so debt-laden. I prefer to own the debt in such a holding, but it is a personal bias I must overcome. I have to pass on this name. The valuations simply are not compelling for me to take a position at the current time.
California Water (CWT)
- Market Cap:$760-million
- Debt-to-Equity: 60%+
- Dividend Yield: 3.3%
- Service Location: California, Washington, Hawaii, New Mexico
CWT is not in my focus based upon a review of the SEC filings and growth rates. The equity is trading at a higher-than-industry dividend yield due to its capital structure and lack of growth rates. I do give credit for their 5 years of providing a positive annualized rate of return, although I would have hoped for a greater return than 1.2% total annualized.
For purposes of analysis, I assumed a 2% growth rate in earnings and dividends. This calculation variable was sure, in hind site, to skew the numbers to a factor I did not have an interest in. Nevertheless, estimates are meant to be broken. That's why they open the market every day. The total returns simply do not merit an investment. Preferred shares and debt offerings in higher rated publicly traded companies, associated with an investment grade balance sheet, offer a higher rate of return. I'll place my water investment dollars elsewhere.
SJW Corporation (SJW)
- Market Cap:$400 million
- Debt-to-Equity: $50%
- Dividend Yield: 3%
- Service Location: San Jose, California. Region between Austin and Dallas, Texas.
SJW Corporation did not perform anywhere near its peers -- an apples-to-apples comparison - within the water sector. The 10k and prior research indicate a disconnect for me. I am not interested in undeveloped land in non-operating states. SJW's small market capitalization is also a negative with regard to obtaining favorable infrastructure financing for future projects.
For my earnings and estimates I assumed a 3% growth rate. The past 5 years indicate that this is not the Rock of Gibraltar investment I am seeking. The locations of San Jose, CA and Texas do not possess any synergies that I am interested in. In terms of creating shareholder value, the business model does not make sense to me. Management must be on top of their game and working with a seamless business model and a well-reasoned business plan. I do not see either to the extent I am interested in extending investment dollar outlays.
Life is full of decisions. Based upon the above analysis, I have AWK on my radar screen. The company's past 5 year performance and the future dividend increases show the kind of results-driven business model I am looking for in a water utility.
Source: Companies websites, SEC filings.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.