I love utilities, for some reason; their always-in-need nature; the customer base that stays steady and consistent; their ability to increase prices slightly to acquire different companies to expand their customer base and gain synergies, as well as the finite resource to them. What is the best resource? To me, this is hands down, water.
How about a company that earns almost $850 million annually in revenue (based on annualizing results from the third quarter) and has increased its dividend for over 19 years, consecutively? I am talking about Aqua America, Inc. (WTR). They are based in Pennsylvania and cover areas including, but not limited to, Ohio (my state!), Texas, Illinois, Virginia, Indiana, New Jersey and North Carolina. Additionally, they not only supply and treat water but now will be natural gas suppliers with their acquisition of People's, announced on the 23rd of October. The acquisition is expected to be accretive to earnings during the first full year, which is expected to close in the 2nd to 3rd quarter of 2019.
Additionally, their financial statements are rock solid. I will be reviewing their recent 10-Q filing and comparing the income statement to the same period in the prior year, as well as for the balance sheet, comparing that to the year-end of December 31st. Their top-line revenue increased from $606 million through 9 months of 2017 to $632 million through 9 months of 2018 or 4.3%. Additionally, net income increased from $186 million to $196 million, over that same time period, or 5.4%. This was primarily due to a reduction in taxes. However, I want to point out that their margin for profits is extremely high at 31% and has gotten better from the 9 months ended in 2017. Additionally, to take a look at their balance sheet, their current assets increased from December 31st, 2017 to September 30th, 2018, by $18 million, to $149.3 million. During that same time period, their current liabilities only increased $3.7 million to $288.2 million. Therefore, the current ratio is now at 0.52, better, but not great. Aqua has quite the liabilities but is more liquid than most utilities.
Given we are the Dividend Diplomats, what about that side of the equation? Since this is a dividend stock analysis, we have to place them through our Dividend Diplomats' Stock Screener. This will help identify if WTR is an undervalued dividend growth stock. Our stock screener uses three simple screens to identify the stocks: P/E ratio (valuation), dividend yield (what they currently pay), dividend payout ratio (company's ability to grow their dividend), and their dividend growth rate/history of increasing their dividend (to validate their practice of increasing their dividend over a period of time).
1.) Dividend Yield: We will use the current price of $32.37 (11/8). WTR's current dividend is $0.876 per year. This calculates to a dividend yield of 2.70%. This is higher than the S&P 500 average yield (the market, as a whole) and is slightly higher than any savings or short-term CD out there. I like the yield, but let's see the other metrics.
2.) Payout Ratio: Typically, we use a 60% payout ratio threshold for stocks to pass our screener. At $1.41 estimated earnings per share, based on the average of 10 analysts reviewing the company, the payout ratio is 62%, based on the $0.876 dividend. This is right at the ceiling of the range I like, which is between 40% and 60%. However, for a utility, this is on the lower-end, as most payout much higher.
3.) Dividend Growth Rate And History: The company has increased the dividend 19+ years, and I don't see that stopping anytime soon. Further, their payout ratio above will allow them to increase their dividend in future years, especially if they are able to add to their net income via the People's acquisition. The 3-year dividend growth rate is 7.37%, and the 5-year dividend growth rate is 6.46%. Since WTR carries a yield below 3%, I would anticipate a 7% growth rate, on average, going forward.
4.) Price to Earnings Ratio (P/E): At a current price of $32.37, with expectations of $1.41 in earnings, this equates to a P/E ratio of 22.95. This is right on par with the S&P 500 on average. I typically like to see below 20 and definitely below the market as a whole. I don't see a major problem here but would say that this is lower for them to be here, as they typically have a higher P/E ratio, as most water utility companies do.
Aqua America, Inc.'s Dividend Stock Analysis Conclusion
Aqua America is near their 52-week low. They are down almost 18% year-to-date and are showing value, but the price to earnings is still over 20. However, they have the longevity and consistency in dividend increases, which we all come to love. Additionally, they still show room in their payout ratio to increase their dividend forward, therefore, the risk is low that they would not increase their dividend.
Since they are adding a different way to earn revenue, with natural gas, and are adding to their customer base, consistently, I am eager to see their results after the People's acquisition closes, as I would believe I would see a significant amount of growth. I would believe there would be significant synergies with backoffice operations and other ways to benefit from each other's resources.
Further, with utilities in general, and specific to water, these are finite, and I believe that water is the most critical resource out there. We all drink, shower, wash clothes, make food, and they all take a certain resource - water. Therefore, the company is more recession-proof than others, and they even increased their dividend during the last 2 balloon bursts - the tech bubble and the financial crisis.
At current price levels, I will be looking to add to my portfolio, Aqua America, Inc. stock. What are you seeing? Anything that I am missing? Would love to hear your thoughts, please share them below! Thank you again for stopping by, good luck and happy investing!
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in WTR over 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.