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Throughout the world, clean and safe drinking water is a scarce and precious commodity, and even closer to home, there is a lot of concern that our future clean fresh water supplies are endangered. There were reports that major lakes and rivers throughout our country are in danger of going dry and limiting our supply of fresh clean water. Water utilities represent publicly traded companies that are focused on supplying and maintaining fresh water to their customers. However, like many other utilities, most water utilities are now regulated. Consequently, they are poised to provide investors with conservative and attractive dividend yields.

The following summary of the publicly traded investor-owned water utility companies industry was found on the website of the California Water Services Group (NYSE:CWT):

Industry Overview

Like their municipal and privately owned counterparts, investor-owned water utilities deliver drinking water to customers' homes and businesses. After a period of considerable consolidation in the industry, only 11 investor-owned water utilities remain in the United States. Investor-owned water utilities typically appeal to conservative investors because their rates are regulated, their earnings drivers are straightforward, their dividends are steady, and their product is both essential and irreplaceable. California Water Service Group is the third largest investor-owned water utility in the United States.

Of the 11 publicly traded water utilities, this article will look at six with above-average yields and prospects for moderate to above-average future growth of earnings and dividends. For perspective and comparison, the current yield on the average company as represented by the S&P 500 is 1.9%.

The following table summarizes six water utilities with above-average dividend yields and lists them in order of dividend yield highest to lowest. From left to right, the table shows the company's stock symbol and name. Next, two valuation metrics are listed side-by-side, the current PE ratio followed by the historical normal PE ratio for perspective. Then the five-year estimated earnings per share growth is shown next to each company's historical EPS growth providing a perspective of the past versus the future growth potential of each company. The final three columns show the current dividend yield, the company sector and its market cap.

(Click charts to enlarge)

A Closer Look at the Past and the Future Potential

Since a picture is worth 1,000 words, we'll take a closer look at the past performance and future potential of each of our five candidates through the lens of F.A.S.T. Graphs™.

Earnings Determine Market Price: The following earnings and price correlated historical graphs clearly illustrates the importance of earnings. The Earnings Growth Rate Line or True Worth™ Line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings. The historical normal PE ratio line (dark blue line with*) depicts a PE ratio that the market has historically applied.

The orange line and the blue normal PE ratio line provide perspectives on valuation. The orange line reflects the fair value of each company's earnings relative to its growth rate achievement, and the blue line reflects how the market has traditionally valued the company's stock relative to its fair value. The blue line represents a trimmed historical normal PE ratio (the highest and lowest PEs are trimmed). These lines should be viewed as barometers or aids for ascertaining sound buy, sell or hold decisions. Rather than seen as absolutes, they should be seen as guides to better thinking.

About Middlesex Water Co. (NASDAQ:MSEX): Directly from its website

Middlesex Water Company provides regulated and nonregulated water, wastewater and related services to a population of over 450,000 in New Jersey and Delaware. We have grown from a single water utility to nine distinct operating units meeting a full range of residential, commercial, industrial and municipal water and wastewater needs.

The consensus of three leading analysts reporting to Capital IQ forecast Middlesex Water Co.'s long-term earnings growth at 4.5%. Middlesex Water Co. has medium long-term debt at 43% of capital. Middlesex Water Co. is currently trading at a P/E of 20.9, which is above the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Middlesex Water Co.'s True Worth™ valuation would be $18.69 at the end of 2017, which would be a 4.9% annual rate of return from the current price.

About California Water Service : Directly from its website

California Water Service Group is the parent company of California Water Service Company, Washington Water Service Company, New Mexico Water Service Company, Hawaii Water Service Company, Inc., CWS Utility Services, and HWS Utility Services, LLC. Together these companies provide regulated and non-regulated water service to approximately 2 million people in more than 100 California, Washington, New Mexico and Hawaii communities. Group's common stock trades on the New York Stock Exchange under the symbol CWT.

The consensus of seven leading analysts reporting to Capital IQ forecast California Water Service's long-term earnings growth at 7%. California Water Service has medium long-term debt at 52% of capital. California Water Service is currently trading at a P/E of 17.9, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, California Water Service's True Worth™ valuation would be $23.56 at the end of 2017, which would be a 7.9% annual rate of return from the current price.

About Aqua America Inc. (NYSE:WTR): Directly from its website

Aqua America is one of the largest U.S.-based, publicly-traded water utilities and serves almost 3 million residents in Pennsylvania, Ohio, North Carolina, Illinois, Texas, New Jersey, Indiana, New York, Florida, Virginia, and Georgia. Aqua America is listed on the New York Stock Exchange under the ticker symbol WTR.

The consensus of 13 leading analysts reporting to Capital IQ forecast Aqua America Inc.'s long-term earnings growth at 9%. Aqua America Inc. has medium long-term debt at 57% of capital. Aqua America Inc. is currently trading at a P/E of 21.5, which is above the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Aqua America Inc.'s True Worth™ valuation would be $24.93 at the end of 2017, which would be a 5.9% annual rate of return from the current price.

About SJW Corp. (NYSE:SJW): Directly from its website

SJW Corp. is a publicly traded holding company headquartered in San Jose, California. SJW Corp. is the parent company of San Jose Water Company, SJWTX, Inc., Texas Water Alliance Limited, and SJW Land Company. Together, San Jose Water Company and SJWTX, Inc. provide regulated and nonregulated water service to more than one million people in San Jose, California and nearby communities and in Canyon Lake, Texas and nearby communities. SJW Land Company owns and operates commercial real estate investments.

The consensus of two leading analysts reporting to Capital IQ forecast SJW Corp.'s long-term earnings growth at 13%. SJW Corp. has medium long-term debt at 54% of capital. SJW Corp. is currently trading at a P/E of 21.2, which is above the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, SJW Corp.'s True Worth™ valuation would be $32.53 at the end of 2017, which would be a 8.8% annual rate of return from the current price.

About American States Water Co. (NYSE:AWR): Directly from its website

American States Water Company is the parent of Golden State Water Company and American States Utility Services, Inc. Through its utility subsidiary, Golden State Water Company, AWR provides water service to approximately 1 out of 36 Californians located within 75 communities throughout 10 counties in Northern, Coastal and Southern California (approximately 256,000 customers). The Company also distributes electricity to over 23,000 customers in the Big Bear recreational area of California. Through its contracted services subsidiary, American States Utility Services, Inc., the Company provides operations, maintenance and construction management services for water and wastewater systems located on military bases throughout the country.

The consensus of seven leading analysts reporting to Capital IQ forecast American States Water Co.'s long-term earnings growth at 6%. American States Water Co. has medium long-term debt at 44% of capital. American States Water Co. is currently trading at a P/E of 16.5, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, American States Water Co.'s True Worth™ valuation would be $43.96 at the end of 2017, which would be a 6.5% annual rate of return from the current price.

About American Water Works Co. Inc. (NYSE:AWK): Directly from its website

Founded in 1886, American Water is the largest publicly traded U.S. water and wastewater utility company. With headquarters in Voorhees, N.J., the company employs approximately 7,000 dedicated professionals who provide drinking water, wastewater and other related services to an estimated 15 million people in more than 30 states and parts of Canada

The consensus of 11 leading analysts reporting to Capital IQ forecast American Water Works Co. Inc.'s long-term earnings growth at 8.5%. American Water Works Co. Inc. has medium long-term debt at 57% of capital. American Water Works Co. Inc. is currently trading at a P/E of 18.4, which is above the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, American Water Works Co. Inc.'s True Worth™ valuation would be $43.65 at the end of 2017, which would be a 7.9% annual rate of return from the current price.

Summary and Conclusions

Although water utilities do not offer a significant amount of growth, they do offer income oriented investors some inflation protection and a moderately growing income stream. However, due to their less-than-strong capability for growth, prospective investors should pay very close attention to current valuation in relationship to the historical valuation that the market has applied to each company. Since earnings represent a source of future capital appreciation and dividend growth, and since growth is as limited as it is with water utilities, caveat emptor applies.


Disclosure: I am long AWK.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

Source: 6 Water Utilities With Above-Average Dividend Yields