5 For-Profit Water Utilities For Safety And Yield

Includes: AWK, AWR, CWT, MSEX, WTR
by: Investment Underground

By Marc Rothstein

While most most Americans are served by municipally owned water providers, there are a number of communities that have turned to for-profit water utilities. Typically, the reason cited is that it expensive to maintain aging water pipes. However, that concern also applies to private companies. Water is a necessity for life, and, like their electric counterparts, water utilities offer room for profit. In this article I will look at five-for profit water utilities that account for 90% of the public for-profit market. As a group, this asset sub-class has a very low beta, and generous dividend history.

American States Water Company (NYSE:AWR)

AWR is listed on the NYSE, and has recently been trading at about $35 per share. Its 52 week range is from $38.10 to $30.53. It has a market capitalization of about $660 million, and has a trailing P/E of 17. It currently pays an annual dividend of $1.12, for an effective yield of 3.2%.

AWR is having a good year. In the third quarter of 2011, it posted net profit from continuing operations of $15.6 million, or $0.83 per share, compared to the year earlier quarter when it earned $6.7 million. For the first nine months of 2011, AWR earned $2.08 per share, versus the year earlier period's earnings of $1.28 per share.

AWR's focus is on California, and regulators there have approved several rate cases in 2010 and 2011. Yet, it is highly likely construction and maintenance requirements will be increasing annually. Right here and now, AWR looks undervalued.

Middlesex Water Company (NASDAQ:MSEX)

MSEX is listed on NASDAQ, and was trading recently for about $18.50 a share. Its very narrow 52 week range is from $19.44 to $16.41, and its market capitalization is just under $300 million. Its P./E is 21, and it pays an annual dividend of $0.74 per share, for a yield of 4.0%.

In its third quarter of 2011, MSEX' income fell about 12% from the year earlier quarter. The company blamed this on Hurrican Irene's impact as well as on a historically wet summer in New Jersey. The company's balance sheet is also unimpressive, with 40 times more debt then cash.

What MSEX has going for it is history. It was founded in 1897, and has increased its dividend payment to shareholders each and every year for 39 years. If you are an income investor, look carefully at MSEX for its hefty yield.

Aqua America, Inc. (NYSE:WTR)

WTR is listed on the NYSE, and was trading there recently at about $22 per share. Its narrow 52 week range is from $23.79 to $19.28, and its market capitalization is a little over $3.1 billion. It trades at a P/E of 22.6, and pays an annual dividend of $0.66, for a yield of 3.0%.

WTR had a successful third quarter to 2011. Its income from continuing operations rose 13% from the year earlier quarter, to $45.5 million. Over the longer term, it has tripled its customers and revenues in the past ten years via some 200 acquisitions. It has also been successful in rate cases in its various states, it is likely, but not certain, that success will continue.

WTR strikes me as a quintessential income stock. With a beta of 0.17, its price stability is exceptional. I do not know if its profit picture can sustain growth given its system maintenance needs. But WTR has shown the ability to grow its revenue base, Eventually, those maintenance needs will overtake the company's ability to increase revenue. But it has paid a dividend since 1945, and raised its dividend 21 times in the last 20 years, so that, to me, is a compelling reason for further investigation.

American Water Works Company, Inc. (NYSE:AWK)

AWK is listed on the NYSE, and was trading there recently at just over $31 per share, near the top of its 52 week range of from $31.49 to $23.84. It has a market capitalization of nearly $5.5 billion, and a P/E ratio of 17.8. Its current annual dividend is $0.92, for a yield of 3.0%

AWK also had an excellent third quarter as revenue increased 2.3% from the year earlier to $767 million, and profits increased 17.3% from the year before. The direction of the company is clearly up. Its stock price is up 25.3% for the 52 weeks ending November 11, 2011.

AWK is the nations largest water utility, and has operations in the majority of U.S states and two Canadian provinces. That sheer breadth helps to level off earnings and provide growth opportunities. AWK is a solid choice for intermediate to long term investors.

California Water Service Group (NYSE:CWT)

CWT is listed on the NYSE, and was trading recently for about $18.50 per share. Its 52 week range is from $19.37 to $16.65, and its market capitalization is about $780 million. Its P/E ratio is 19, and its current annual dividend is $0.62, for a yield of 3.4%

CWT reported nearly flat income in the 2011 third quarter compared to the year ago period. Its net income increased just 2% to $20.9 million, or $0.50 per share.. This despite an increase of 16% to $169 million in revenues. CWT blamed the discrepancy on increased personnel and water production costs.

Not all is gloomy though. CWT is a dividend champion to be sure. It has increased its dividend payments 44 consecutive years, and its dividend is currently well covered by earnings. Additional years of increases are highly likely, and income investors would be well served to look more carefully at CWT.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.