Water utilities offer steady dividends and capital preservation for those interested in investing for income. Risk of competition is off the table, as these companies control the water distribution and wastewater management in their respective areas of operation, making them monopolies in these regions.
Since 60% to 70% of our bodies are made of water, it is essential to our existence. In addition to consumption, water is used daily at the household and industrial levels for cleaning, flushing, and watering lawns, gardens, and farms. Let's take a look at how to benefit from the key water utility companies that supply our tap water.
Aqua America (WTR) is a $3.56 billion mid-cap Bryn Mawr, PA based water utility company serving 12 states in the U.S. The company pays a 2.6% dividend. Aqua has increased its dividend 21 times in the past 20 years and has paid dividends for more than 65 years.
Aqua America's long-term business model is growth-through-acquisition. Recently, Aqua has paired up with Penn Virginia Resource Partners (PVR) to construct and operate a private pipeline system to supply fresh water to certain natural gas drillers in the Pennsylvania portion of the Marcellus Shale. This is a prime example of Aqua's continuous efforts to grow.
The company is trading at 2.8 times book value per share. Aqua America has a profit margin of 20.96% and an operating margin of 40%. It has operating cash flow of $370.7 million. The company is expected to grow earnings annually at 5.93% for the next five years. If dividends are reinvested, investors can expect a $10,000 investment in WTR to be worth about $15,000 in five years.
American Water Works (AWK) is a $6.14 billion mid-cap Voorhees, NJ based water utility serving 1,100 communities in 17 states. The company pays a 2.9% dividend and has raised the dividend payment every year since 2009. This is an excellent dividend track record considering the company last went public in 2008.
American Water Works is the largest publicly-traded U.S. water and wastewater utility company. The company proactively invests in improving infrastructure. Investing $800 million to $1 billion annually, contributes approximately 6% to earnings growth.
The company trades at only 1.43 times book value per share. It has a profit margin of 12.1% and an operating margin of 30.43%. The company has a strong operating cash flow of $794.93 million and free cash flow of $168.6 million. AWK is expected to grow earnings annually at 8.37% for the next five years. If dividends are reinvested, investors can expect a $10,000 investment in AWK to be worth about $17,000 in five years.
Although both companies should do well for the long-term, American Water Works looks like the better deal. It has a better valuation, a higher dividend, and higher expected growth than Aqua. Consider an investment in this prized water monopoly.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.