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 an incredible monitor document in terms of paying dividends to shareholders.

AWR is a part of the Dividend Kings, a bunch of shares which have raised their payouts for a minimum of 50 consecutive years. You possibly can see all 53 Dividend Kings right here.

And, you possibly can obtain the total record of Dividend Kings, plus necessary monetary metrics resembling dividend yields and price-to-earnings ratios, by clicking on the hyperlink under:

Dividend Kings are the “better of one of the best” in terms of rewarding shareholders with money, and this text will talk about 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 incorporates 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 talk about the the reason 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 wherein it supplies companies for water distribution and wastewater assortment on 11 army bases within the U.S.

Associated: The 7 Finest Water Shares To Purchase Now

The regulated water utility enterprise is by far crucial 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 companies to water and wastewater methods on army bases is critical as nicely. AWR has signed 50-year contracts with the army 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.

Consequently, they depend on the regulatory authorities to approve price hikes yearly. These price hikes purpose to assist utilities service their debt, however they often end in modest income and earnings development.

Authorities have incentives to supply engaging price hikes to utilities to encourage them to proceed investing closely in infrastructure. Then again, authorities attempt to maintain shoppers glad, so that they often provide restricted price 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 median annual price of seven.6%.

AWR achieved a superior development tempo primarily due to the fabric price hikes it has obtained from regulatory authorities and its development in its non-regulated enterprise. General, 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, have been $0.86 per share. AWR’s water section recorded diluted earnings at $0.67 per share in Q2 2024, down from $0.91 per share the earlier 12 months, as a result of components together with elevated working and provide prices, curiosity bills, and changes in revenues tied to regulatory selections.

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

Supply: Investor Presentation

This has helped the corporate develop its earnings per share at a 7.6% common annual price during the last decade, which is without doubt one of 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 12 months. That is above the everyday dividend development price 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 aim of elevating the dividend by greater than 7% per 12 months on common over the long run.

Supply: Investor Presentation

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

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

Because of its wholesome payout ratio of ~61%, sturdy stability sheet, and sustained development, AWR has an excellent probability of delivering its bold aim of greater than 7% annual dividend development to its shareholders.

Going ahead, AWR is more likely to proceed rising at a significant tempo due to price 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 kind impenetrable limitations to entry for potential opponents.

It’s primarily unimaginable for brand new opponents to enter the utility markets wherein 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 undergo throughout recessions, utilities are among the many most resilient corporations throughout such intervals, as financial downturns don’t have an effect on water and electrical energy consumption.

The resilience of AWR was outstanding within the Nice Recession. Its earnings-per-share in the course of 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% enhance)
2010 earnings-per-share of $1.66 (3% enhance)

Due to this fact, AWR remained resilient in the course of 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 without doubt one of 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 12 months. Consequently, the inventory is at the moment 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 slightly wealthy price-to-earnings ratio, which has been sustained through the years, may be attributed, a minimum of partially, to the depressed rates of interest over the previous decade.

When rates of interest are low, income-oriented traders have an issue figuring out engaging yields available in the market. Thus, they view the dividend yields of utilities as extra engaging. Consequently, 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 document of shareholder worth creation, which the corporate has confirmed it will possibly ship even in the course of the harshest market environments.

Nonetheless, no person can assure this may stay the case indefinitely. The inventory may simply be priced decrease if traders get up to the belief 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 shifting ahead.

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

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

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

Last Ideas

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

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

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

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

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