Tag Archives: america

Water Utilities: American Water Works, Aqua America Are The Best Fundamental Selections

American Water Works and Aqua America rank highest on the average positioning of five fundamental criteria. American States Water is not far behind. A few water utility stocks have rewarded investors with total returns in excess of the S&P. There are a plethora of firms that play in the water sector from an infrastructure viewpoint. Regulated water utilities have been a sub-sector that attracts investors looking for the stable income attributes of a utility with exposure to both small-caps and a consolidation trend. Some utilities are pure water-focused and some firms have a diversified asset approach where water is a portion of their business portfolio. In addition, there are other industries that are water-related, such as desalination and water treatment along with pumps, pipes, and meters. A good recap of the investment thesis is provided by S Network, developer of the S Network Water Technology Index and S Network Water Works Index. These indexes were previously branded as Janney Indexes. Hundreds of articles have been published on the investment opportunities in the water sector. The underlying thesis is the same: water is one of the most crucial inputs to the global economy, not only supporting residential populations with safe, reliable drinking water, but as a necessary “feedstock” for industrial processes, including electrical power generation, semiconductor manufacturing, pharmaceutical production, and food and beverage processing. Water is also vital to agricultural production, and increasingly rainwater and groundwater supplies are not meeting local agricultural needs in many places around the globe. Within the US, there are regional water issues and many of these cross state regulatory boundaries. For example, according to a report published by calvert.com: ● California – According to the University of California, Davis, climate models show California’s water supply could fall up to 30% over the course of this century. The state’s plan to reduce per capita urban water usage 20% by 2020 is one of many efforts to address this. ● Great Lakes Region – Concerned about proposals to divert its water to other areas, an eight-state agreement now bans water exports from the Great Lakes-home to 90% of the nation’s freshwater and drinking water for 30 million people. ● Northeast – Aging infrastructure causes as much as 50% of clean water here to leak into the ground between treatment centers and the tap. ● The South – Drought has crippled the region in recent years, particularly Texas, where a record-level drought has decimated farms and ranches and caused billions of dollars in damage to the state’s economy. ● Gulf Coast – States such as Florida, Louisiana, and Texas need improvements in storm water management infrastructure due to increased risks from stronger hurricanes. Ten of the more popular stocks for many investors are the following firms, in order of market capitalization: American Water Works (NYSE: AWK ); Aqua America (NYSE: WTR ); American States Water (NYSE: AWR ); California Water (NYSE: CWT ); SJW Corp (NYSE: SJW ); Connecticut Water Service (NASDAQ: CTWS ); Middlesex Water (NASDAQ: MSEX ); York Water (NASDAQ: YORW ); Artesian A (NASDAQ: ARTNA ); Consolidated Water (NASDAQ: CWCO ) As Roberto Clemente once said, “Water stocks have been very, very good to me.” Below are 12-month charts of eight water companies as offered on finviz.com. (click to enlarge) (click to enlarge) (click to enlarge) However, not all water investments have been barnburners over the recent past. Below is a table of average annual 3-year and 5-year total returns, which includes share price appreciation plus dividend income, sorted by highest to lowest 5-yr return (S&P 500 average annual total returns are 17.8% and 16.5%, respectively): Source: Morningstar There is quite a difference between the best and the worst performers. However, this is yesterday’s news and investors should be looking towards tomorrow’s news. One management attribute worth analyzing is their ability to generate return on invested capital ROIC. The advantage of ROIC is it evaluates returns across the capital structure and is not limited to just equity or assets. One would think the highest returns would correlate with the highest share price appreciation, but it does not. Below is the same ten companies’ average ROIC for the previous 3-years and their respective 5-yr total stock returns: Source: Fastgraph, Morningstar, My Investment Navigator Overall, the regulated utility sector has an average ROIC in the 5% range, and most of these companies meet or exceed this level. Nevertheless, ROIC is only half the equation as it only evaluates the return of capital deployed and not the cost of capital. The best companies generate ROIC in excess of their weighted average cost of capital or WACC. Below is the Net ROIC, or ROIC less WACC, for these ten companies: Source: My Investment Navigator, Morningstar, ThatsWACC.com It seems only two management teams have generated returns on their total capital structure in excess of the cost of the same capital. It is intriguing the stocks with the best 5-yr total stock returns are not those generating the highest investor returns based on capital deployed and the cost of that capital. Dividend growth investors would be please by the majority of water utilities, and most have outpaced the meager inflation numbers of the past three years. In 2012, inflation as measured by the monthly CPI averaged 2.1%, in 2013 it was 1.5% and last year 1.6%, for a 3-yr average of 1.7%. Source: Reuters S&P offers an Equity Quality Ranking system evaluating a company’s 10-yr history of consistently generating earnings and dividend growth. The rankings range from A+ as the Highest, B+ as Average and NR as Not Rated. The Quality Ranking for these 10 companies are: A+: None; A: AWR, WTR, YORW; A-: CWT, MSEX, ARTNA. CWTS is ranked B+, SJW as B, and AWK, CWCO as Not Rated. Some investors prefer the diversity and ease of water ETFs: PowerShares Water Resources (NYSEARCA: PHO ), Guggenheim S&P Global Water Index (NYSEARCA: CGW ), PowerShares Global Water Resources (NYSEARCA: PIO ), and First Trust ISE Water Index (NYSEARCA: FIW ) Fund. In addition to these popular water utility firms and ETFs, several others play in the water sector. Of interest is the list offered by S Network Water Technology Index found here . These are global companies in the infrastructure, pump, and metering business with exposure to the water industry. Scanning these names may provide further opportunities worth researching. S Network also offers a variety of water information resources linked to its site here . I prefer to pick specific stocks over ETFs, unless there is disruptive technology involved that can upset the apple cart, and I do not see this happening in the water sector. As one who believes in ROIC, if I had to chose one water utility, it would be either American Water Works or Aqua America. Below is that ranking of each company in the tables above. AWK and WTR ranked the highest on average of these five criteria. American States Water is very close as well and should not be forgotten. Ranking By Order For Each Category Source: My Investment Navigator I have been writing about water stocks since 1997 and the trends in water investing are called out in my two books. This is one area every investor should have in their utility portfolio. Author’s Note: Please review disclosure in Author’s profile. Disclosure: The author is long WTR, AWK. (More…) 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.

Dividend Growth Stock Overview: Aqua America, Inc.

Summary Aqua America provides water and wastewater services to 3 million customers across 8 states. The company seeks to grow through acquisitions; it completed 13 acquisitions in 2014. Aqua America has increased dividends for 22 years, and over the past 5 years, it has grown dividends at an average rate of nearly 7.6%. About Aqua America Aqua America (NYSE: WTR ) is a holding company that, through its subsidiaries, provides water and wastewater utilities to 3 million customers across 8 states. The company owns and operates over 1,440 public water systems, and 187 wastewater treatment plants and collection systems. Aqua America originated as the Springfield Water Company in 1886 when a group of Swarthmore College professors were granted a charter to supply water to residents of Springfield Township, PA. Having started in Pennsylvania, half of Aqua America’s customers are in that state with the remaining customers distributed over Illinois, Indiana, New Jersey, North Carolina, Ohio, Texas and Virginia. Aqua America’s strategic objective is to grow in the fragmented water utility industry through acquisitions. The company completed 13 acquisitions in 2014. The most recent acquisitions were the Caroline Water Company, which serves 3,000 people in Caroline County, VA; Texas H2O which serves 3,300 customers in the suburbs of the Dallas-Fort Worth metropolitan area; and the Spartan Village water and wastewater systems – serving 650 customers – from the New Jersey village government. In 2013, the last year for which full-year figures are currently available, Aqua America’s income was $221.3 million, up 12.6% from 2012; and its income per share was $1.25, up 11.6% from 2012. Aqua America’s customer base was up 1.3% to 941,000 customers. One area of concern is the company’s high level of debt. At the end of 2013, Aqua America had $1.5 billion in long-term, fixed-rate debt with an average interest rate of 5%. Another area of concern is the degree to which Aqua America’s organic income growth is dependent on rate increases granted by local and state regulatory authorities. The company is a member of the S&P Mid Cap 400 index and the S&P’s High Yield Dividend Aristocrats index, and trades under the ticker symbol WTR. Aqua America, Inc.’s Dividend and Stock Split History (click to enlarge) Aqua America has paid quarterly dividends since 1944 and increased dividends annually since 1992. Last year, Aqua America announced a dividend increase of 8.6%, from 15.2 cents to 16.5 cents per share, at the beginning of August. The stock went ex-dividend with the increased dividend in mid-August. I expect Aqua America to announce its next dividend increase in early August 2015. Aqua America has a history of moderate dividend increases, with annual dividend growth in the mid-single digit percentages. From 2009-2014, Aqua America grew its dividend from 44 cents to 63.4 cents per share, for a 5-year compounded annual dividend growth rate (CADGR) of 7.58%. Aqua America’s 10-year and 20-year CADGRs are 7.99% and 6.83%, respectively. Aqua America has split its stock eight times since 1986. In September 1986 and June 1996, Aqua America conducted 3-for-2 stock splits. This was followed by a 4-for-3 stock split in January 1998, and 5-for-4 stock splits in December 2000, December 2001, and December 2003. In December 2005, Aqua America split its stock again, this time 4-for-3. And most recently, the company split its stock 5-for-4 in September 2013. Over the 5 years ending on December 31, 2014, Aqua America stock appreciated at an annualized rate of 16.93%, from $12.22 to $26.70. This beat both the 13.0% annualized return of the S&P 500 and the 14.9% annualized return of the S&P Mid Cap 400 index during this time. Direct Purchase and Dividend Reinvestment Plans Aqua America has both direct purchase and dividend reinvestment plans. The company has created a very favorable pair of plans for investors. The company pays nearly all of the fees associated with purchasing stock, including through dividend reinvestment. There are no fees to setup an account, or to purchase stock – either directly or through dividend reinvestment. The minimum investment for new accounts is $500, either in a single purchase or in 10 monthly installments of at least $50 each. The plan permits both purchases by check or automatic debit. The most attractive feature of Aqua America’s dividend reinvestment plan is the discount. The company currently offers a 5% discount on the purchase price of shares bought through the dividend reinvestment plan. This will reduce your cost basis and is taxable, but is extremely beneficial to you as an investor. Aqua America is one of a very few companies that offers shares purchased through dividend reinvestment at a discount to the market price. Finally, when you go to sell your shares in the plan, you’ll pay a transaction fee of either $15 or $25, depending on the type of sell order you request. You’ll also pay an additional fee of 12 cents per share sold. Furthermore, if you place your sell order through a representative on the phone, you’ll pay an additional fee of $15. Helpful Links Aqua America, Inc.’s Investor Relations Website Current quote and financial summary for Aqua America, Inc. (finviz.com) Information on the direct purchase and dividend reinvestment plans for WTR