Aqua America: Quantifying The Dividend Reinvestment Discount

| About: Aqua America, (WTR)
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Summary

Aqua America doesn’t get talked about very often, but it has three great things going for it.

These include a sustainable business, a strong history and a discounted dividend reinvestment plan.

This article quantifies the benefit of this discount.

Recently I have been reviewing Aqua America (NYSE:WTR), a water utility providing service to about three million people in eight states. With a history dating back to 1886, there are a lot of things to like about this company. For one, it's a water utility. As such, it acts like a monopoly: providing a product that people need in order to stay alive. You can quibble over the cyclicality of the oil markets or the staying power of sugary beverages, but I'd contend it's a pretty good bet that water services will be around for awhile.

The investment side also has an interesting story to tell. Sure, you could point to regulation as a potential damper on growth, but history indicates this might not be much of a concern. Dating back to 1998, the company has posted higher earnings in all but one year. Perhaps just as impressive is the idea that during the last decade earnings per share have grown by nearly 9% per annum.

Moving to dividends, the notable story continues. Aqua America has paid quarterly dividends for 69 years. The company has not only paid but also increased this payout for 23 straight years. Over the past decade, these increases have come in at the tune of nearly 8% annually. Although the dividend yield isn't exceedingly impressive - presently sitting near 2.5% - it's clear that the company has the inclination to continue to reward shareholders.

Finally, and this what originally caught my attention, the company offers a 5% discount if you elect to use the dividend reinvestment plan. Personally, that hits the trifecta. You have an easy to understand business with staying power, a strong history of earnings and dividend growth with a propensity to continue this into the future and you get a discount to boot. Talk about an incentive to be a long-term owner.

Naturally, I became interested in determining just how much of an impact this discounted reinvestment plan could offer. So let's work through a few examples to provide some insight.

The company split its stock last year, with an effective date of September 1st. To avoid the split-adjustment hassles, we'll begin with a September 3rd, 2013 start date - just 15 month ago.

On this date, shares of Aqua America closed at $24.50. We'll suppose you purchased 100 shares, for a cost basis of $2,450. Over the next five quarters you would have received the following dividend per share payments:

Dec 2013 = $0.152

Mar 2014 = $0.152

Jun 2014 = $0.152

Sep 2014 = $0.165

Dec 2014 = $0.165

On a per share basis this equates to $0.786, or $78.60 in total. As of December 2nd's close those same shares would now be valued at $2,645. Your total investment would be worth $2,723.60 and the annualized return would be 8.84%. Additionally, you would now expect to collect at least $66 in yearly dividend payments (prior to thinking about the likely increase next year) for a yield on cost of 2.69%.

If you reinvest those dividend proceeds, the returns start to get a bit better. Taking those same dividend payments and reinvesting at the closing price on each payment date results in no dividends in hand, but an extra 3.188 Aqua America shares. Your total value would be $2,729.33 and the annualized return would equate to 9.02%. If you stopped reinvesting today, you would expect to collect at least $68.10 annually for a yield on cost of 2.78%.

Finally, you have the 5% dividend reinvestment plan. In this instance you collect the same per share dividends and reinvest on the same dates as the above paragraph. The difference is that you get to do so at a 5% lower price. At the end of 15 months you would have accumulated 103.36 shares, for a total value of $2,733.83. Your annual return would be 9.17% with a similar yield on cost. Here's a table summarizing the possible outcomes:

End Shares End Value Annual Return Forward Income
No Reinvest 100 $2,723.60 8.84% $66
Reinvest 103.19 $2,729.33 9.02% $68.10
5% Discount 103.36 $2,733.83 9.17% $68.22

From this it's clear that there would have been a tangible benefit in both reinvesting and receiving the discount. (Note that without reinvestment you would have cash on hand to deploy, but you would still not be able to replicate the other two options at today's prices) Perhaps these numbers are not overly impressive, but there are a few things to keep in mind. First, the invested values are relatively small. As the amount invested magnifies, so does the magnitude of the difference - a handful of dollars would easily be hundreds or thousands to a larger investor. Additionally, 15 months is a rather short time horizon.

Given this information, we can extrapolate forward to endeavor a guess as to the reinvestment benefit. As an illustration, suppose that Aqua America is able to grow both earnings and dividends per share by 6% annually and continues on with a 2.5% "current" dividend yield. Again we'll have the three possibilities, but this time we'll use 30 years as our reference point. The cost basis for each will be $2,645 - 100 shares at the December 2nd close.

No Reinvestment

By simply owning and collecting dividend payments for 30 years you could see $5,200 in dividend payments come your way - nearly twice your original investment. Those same 100 shares would be priced above $14,000 for a total value of roughly $19,500. This equates to 7.14% annual returns.

Reinvestment

By periodically reinvesting your dividend payments, you would not have additional cash on hand. However, you would have quite a few more shares - perhaps double the beginning amount ending with 209 shares. This ownership claim would be worth about $30,000 for a yearly return mark of 8.74%.

5% Reinvestment Discount

Finally, we have been reinvesting utilizing the company's 5% discount. Much like the previous example, you would not have additional cash on hand. What you would have is almost 218 shares valued at over $31,000. This would equate to 9.07% annual returns.

Here's what that looks like in a table format:

End Shares End Value Annual Return Forward Income
No Reinvest 100 $19,549.48 7.14% $379
Reinvest 209.47 $30,020.02 8.74% $794
5% Discount 217.67 $31,195.69 9.07% $825

Again, it should be noted that you would have cash on hand with the first option such that you could invest it for a higher forward income than stated. Yet keep in mind that you still couldn't replicate either of the next two options. Once again it's clear that both reinvestment and the discount have value. An astute observation would be related to the magnitude of the returns. The most important thing that you can do is start investing - without this you can't contemplate the next steps. From there, reinvestment might add a percent or two in yearly return results. Finally, in the case of Aqua America, you could have a unique situation whereby you get a nice little cherry reward on top for patiently allowing your dividends to compound at a discount.

In short, I'm not advocating that you partner with Aqua America. Moreover, it's apparent that you shouldn't invest in the company simply because it offers a discounted reinvestment program - chasing the potential for 0.25% higher yearly returns isn't a good enough investment reason. However, I'm making a few observations. You have a variety of things going for this company, namely staying power, great economics, surprising growth and the propensity to reward shareholders. Then and only then - if you like Aqua America for these reasons and more - there's a bonus waiting for the long-term shareholder in the form of a discounted way to compound wealth.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.