Aqua America (NYSE:WTR) is a favorite of bullish investors. All indications are that the upward trend is not stopping any time soon. Despite a few inevitable falls, the dividend payout is likely to continue in coming days.
Founded 131 years ago, Aqua America has grown through expansion and acquisitions to a company providing water and waste services to more than three million people in eight states - Pennsylvania, Ohio, Illinois, North Carolina, Texas, Indiana, New Jersey and Virginia. Aqua Pennsylvania is its biggest subsidiary, serving the greater Philadelphia area.
I like to view WTR's business model as that of a middleman or broker kind of thing. It basically involves modernizing and revamping water storage and treatment systems purchased from local governments. Further, it runs its own channel of water delivery within its areas of operation.
So, what is it about Aqua America that makes it a perennial target for dividend hunters?
It is often said that water is life. Therefore, being a water utility company, Aqua America basically deals in life. Well… at least somehow. Much of the planet is covered by water, most of which is salt water. Fresh water makes up about 2.5% of the world's water. Rising populations and expanding uses of fresh water have stretched water companies almost beyond their capacity. Technology is constantly evolving, which has led to entire water systems being declared obsolete. At times, aging infrastructure has posed health risks to entire populations after water supply is contaminated. The 2016 lead crisis in Flint brought to light the state of the aging and faulty water infrastructure in the US. Estimates show that an overhaul of the American water system will cost the taxpayer around $1 trillion.
Aqua America is one of the players tasked with ensuring smooth flow of water around the US. It seems to be doing a good job so far. But has it also ensured smooth flow of cold hard cash into investors' pockets?
Aqua America remains a darling of many investors, probably due to its consistent dividend payout for over 20 consecutive quarters. The much-coveted earnings of WTR have been cultivated by scrupulous fiscal practices and management of risk to prevent any break in the upward streak. At the time of writing this article, the dividend yield was 2.52%, and has increased by 1.4% since 2012. In my analysis, I consider a safe yield to be in the range of 2.4-4.3%. At 2.52% with a forward dividend yield of 2.59% and a consistent payout of over a decade, WTR's earnings distribution has proved sustainable for shareholders. The payout ratio stands at 60.29%, which I interpret as healthy for a company since it allows for upward dividend growth while cushioning investors from fluctuations in earnings.
Apart from the dividend, the revenue side of WTR seems to be sunny. In Q3 2016, the company posted revenues of $226 million, which was 2.5% higher than $221 million in Q3 2015. Much of this growth was caused by drier weather in the northeastern markets of Ohio, New Jersey and Pennsylvania, which saw increased consumption. In the same period, net income grew 8.5% from $67.4 million to $73.2 million. The first nine months of 2016 saw the earnings per share grow by 6.1% from 0.98% in the same time frame in 2015.
But as with all analysis, I will introduce a fly in the ointment.
A look at the cash flow statement shows a slightly dismal performance. In Q3 2016, the new operating cash flow was $110.6 million, down from $125.36 million in Q3 2015. Depreciation and depletion grew from $31.98 million to $33.88 million in the same period. The total dividend payout was $33.92 million in Q3 2016, up from $31.45 million in Q3 2015. The debt issuance dropped from $22.81 million to $20.79 million in the same period. Thus, WTR had to issue debt in order to keep up with payment of dividend earnings, which can lead to unsustainability in the long run.
Despite the short fall, I think that WTR still stands as a viable stock. When I compare it against American Water Works Company, Inc. (NYSE:AWK) and California Water Service Group (NYSE:CWT), I find it undervalued. Its PE ratio is 24.89 compared to 27.51 and 38.24 for AWK and CWT respectively. It further gives a higher return on equity at 12.05% against 9.07% for AWK and 6.56% for CWT. For now, and given the aforementioned reasons and numbers, I will give a long verdict on this stock.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.