Dividend Kings In Focus: American States Water – Sure Dividend

Up to date on October twenty ninth, 2024 by Felix Martinez

American States Water (AWR) has a tremendous monitor file in the case of paying dividends to shareholders.

AWR is a part of the Dividend Kings, a bunch of shares which have raised their payouts for not less than 50 consecutive years. You’ll be able to see all 53 Dividend Kings right here.

And, you’ll be able to obtain the complete listing of Dividend Kings, plus essential monetary metrics corresponding to dividend yields and price-to-earnings ratios, by clicking on the hyperlink beneath:

Dividend Kings are the “better of the very best” in the case of rewarding shareholders with money, and this text will focus on AWR’s dividend, in addition to its valuation and outlook.

AWR has raised its dividend for 70 consecutive years, incomes it the longest dividend development streak within the inventory market. No different firm encompasses a longer dividend development streak than AWR. For context, the second-longest dividend development streak is Dover Company, that includes 69 years of consecutive annual dividend will increase.

This text will focus on the explanation why American States Water has maintained such an extended historical past of regular dividend will increase.

Enterprise Overview

AWR is primarily a regulated water utility enterprise that serves ~263,000 prospects in California. It additionally has a regulated electrical utility enterprise in California and a non-regulated enterprise during which it gives providers for water distribution and wastewater assortment on 11 navy bases within the U.S.

Associated: The 7 Finest Water Shares To Purchase Now

The regulated water utility enterprise is by far an important division, because it generates ~70% of the corporate’s whole revenues.

Supply: Investor Presentation

Whereas the regulated water enterprise generates most of AWR’s revenues, the non-regulated enterprise that gives providers to water and wastewater programs on navy bases is important as nicely. AWR has signed 50-year contracts with the navy bases, thus securing a dependable and recurring stream of revenues.

Utility shares are slow-growth corporations. They spend monumental quantities on increasing and sustaining their infrastructure, accumulating excessive debt hundreds.

Because of this, they depend on the regulatory authorities to approve charge hikes yearly. These charge hikes goal to assist utilities service their debt, however they normally end in modest income and earnings development.

Authorities have incentives to supply enticing charge hikes to utilities to encourage them to proceed investing closely in infrastructure. Then again, authorities attempt to maintain shoppers glad, so that they normally provide restricted charge hikes.

AWR is a shiny exception to the rule of sluggish development within the utility sector. Up to now decade, the corporate has grown its earnings per share at a mean annual charge of seven.6%.

AWR achieved a superior development tempo primarily due to the fabric charge hikes it has acquired from regulatory authorities and its development in its non-regulated enterprise. Total, it has a much less “boring” enterprise mannequin than a typical utility firm.

Development Prospects

American States Water reported second-quarter 2024 earnings at $0.85 per share, a lower from $1.04 per share in the identical interval of 2023. Adjusted earnings per share for Q2 2023, excluding a $0.18 per share adjustment for refunded income, had been $0.86 per share. AWR’s water phase recorded diluted earnings at $0.67 per share in Q2 2024, down from $0.91 per share the earlier yr, on account of elements together with elevated working and provide prices, curiosity bills, and changes in revenues tied to regulatory choices.

As talked about, utilities are usually slow-growth shares as a result of lackluster charge hikes they obtain from regulatory authorities in trade for his or her hefty capital bills. AWR is superior to most utilities on this side, because it has loved an distinctive 10.5% common annual charge hike in its regulated water enterprise lately.

Supply: Investor Presentation

This has helped the corporate develop its earnings per share at a 7.6% common annual charge during the last decade, which is among the highest development charges within the utility sector.

Furthermore, due to its constructive efficiency, resilience to macroeconomic headwinds, and shiny outlook, AWR raised its dividend by 8.3% this yr. That is above the standard dividend development charge of utility shares.

AWR has now grown its dividend for 70 consecutive years. The corporate’s 10-year dividend-per-share CAGR stands at a passable 9.2%.

It is usually outstanding that administration has set a objective of elevating the dividend by greater than 7% per yr on common over the long run.

Supply: Investor Presentation

Such a excessive dividend development charge is uncommon within the slow-growth utility sector, making the inventory’s 2.2% dividend yield considerably extra enticing.

Furthermore, AWR has a markedly robust stability sheet and an A+ credit standing, one of many highest within the utility trade.

Because of its wholesome payout ratio of ~61%, robust stability sheet, and sustained development, AWR has a very good probability of delivering its bold objective of greater than 7% annual dividend development to its shareholders.

Going ahead, AWR is prone to proceed rising at a significant tempo due to charge hikes in its water utility enterprise. As well as, due to the extremely fragmented standing of the water utility enterprise, AWR may also develop by buying small corporations.

Aggressive Benefits & Recession Efficiency

Utilities make investments extreme quantities in sustaining and increasing their networks. These investments end in excessive debt, however additionally they type impenetrable limitations to entry for potential rivals.

It’s basically inconceivable for brand new rivals to enter the utility markets during which AWR operates.

Even in its non-regulated enterprise, AWR enjoys weak competitors due to the 50-year length of its contracts.

As well as, whereas most corporations endure throughout recessions, utilities are among the many most resilient corporations throughout such durations, as financial downturns don’t have an effect on water and electrical energy consumption.

The resilience of AWR was distinguished within the Nice Recession. Its earnings-per-share throughout the Nice Recession are as follows:

2007 earnings-per-share of $1.56
2008 earnings-per-share of $1.49 (4% lower)
2009 earnings-per-share of $1.61 (8% improve)
2010 earnings-per-share of $1.66 (3% improve)

Due to this fact, AWR remained resilient throughout the Nice Recession, managing to develop its earnings per share by 6% between 2007 and 2010.

AWR’s resilience was additionally evident in 2020, as the corporate nonetheless managed to develop earnings per share regardless of the deep financial downturn brought on by the coronavirus pandemic.

AWR is among the most resilient corporations throughout recessions and bear markets. This resilience is essential because it helps the inventory’s long-term returns and makes it simpler for shareholders to retain the inventory throughout broad market sell-offs.

Valuation & Anticipated Returns

We anticipate AWR to generate earnings-per-share of $3.03 this yr. Because of this, the inventory is at present buying and selling at a price-to-earnings ratio of 27.3. We think about 25.0 to be a good earnings a number of for this inventory.

The fairly wealthy price-to-earnings ratio, which has been sustained over time, could be attributed, not less than partly, to the depressed rates of interest over the previous decade.

When rates of interest are low, income-oriented traders have an issue figuring out enticing yields available in the market. Thus, they view the dividend yields of utilities as extra enticing. Because of this, utility inventory costs profit from suppressed rates of interest.

Surprisingly, even with rates of interest now on the rise, AWR has retained a steep valuation premium. We consider this is because of traders flocking to the corporate’s recession-proof money flows, predictable development avenues, and glorious monitor file of shareholder worth creation, which the corporate has confirmed it may possibly ship even throughout the harshest market environments.

Nonetheless, no person can assure this may stay the case indefinitely. The inventory might simply be priced decrease if traders get up to the conclusion that it trades at an extreme valuation a number of. Due to this fact, we see the potential for the P/E a number of to contract transferring ahead.

If AWR reaches our assumed truthful price-to-earnings ratio of 25.0 over the following 5 years, its earnings a number of will contract, lowering its annual returns by -6%.

Furthermore, AWR is at present providing a 2.2% dividend yield. We additionally anticipate the corporate to develop its earnings per share at a 5.7% common annual charge over the following 5 years.

Placing all of it collectively, AWR is prone to obtain annual returns of 1.9% by way of 2028.

Last Ideas

AWR is rather more fascinating than the common utility inventory because it has some distinctive traits.

During the last decade, it has grown its earnings per share at a excessive single-digit annual charge. That is significantly better than the low development charges of most utilities.

As well as, AWR’s enterprise features a non-regulated phase, which gives recurring income for 50 years and provides important development potential.

Nonetheless, as a result of market’s excessive utility of all AWR’s virtues, shares could possibly be overvalued at their present ranges. With a reasonable five-year anticipated whole return potential, AWR inventory receives a “maintain” score.

The next articles comprise shares with very lengthy dividend or company histories, ripe for choice for dividend development traders: