by Richard Band | March 3, 2014 1:20 pm
“Water utility stocks…boring,” you say? Not so fast.
Drought conditions in the west have brought the demand for water to crisis levels. Farmers in western states, already hurting from last summer’s drought and historic wildfires, will feel the squeeze even tighter this year. And some rural communities in California may completely run out of water by this May.
It just underscores why I’m bullish on water utility stocks for the long term. Fresh water is among life’s indispensable commodities. It’s a product that literally every living being needs, and only certain companies have the infrastructure to deliver it to consumers. Hmm…suddenly, water utility stocks don’t sound so boring.
A well-managed water utility is one of the safest investments you can make—as long as you don’t overpay. Water companies typically trade at higher valuations than industrial stocks, reflecting the water utes’ superior defensive characteristics.
My favored water utility stocks also have a long history of increasing dividends, helping to insulate your portfolio from unexpected shock…while providing much-needed income that younger folks can reinvest to compound their wealth, or that investors closer to retirement can use to support themselves and their families.
Now on to three of the most compelling water utility stocks.
American States Water (AWR) provides water service to one of 36 Californians throughout the northern, coastal and southern regions of the state.
In their recent earnings report, AWR showed an 11.1% increase in diluted earnings per share, but revenues fell short of analyst estimates by 2% due to an increase in the effective income tax rate for the company’s water segment.
I wouldn’t be too worried about this decrease, though. The fundamental need for a water utility company like AWR hasn’t changed, and isn’t likely to when its customer base in California is going to be in dire need of AWR’s services during the anticipated drought.
The company boasts regular annual dividend boosts since 1954, with ample room for more. And at a p/e ratio just north of 19x earnings, it actually trades at a lower multiple of estimated earnings than many other water utilities.
Dividend Yield: 2.7%.
Water utility stock Aqua America (WTR) is one of the world’s safest businesses, with an essential–indeed, life-sustaining–product; a geographically diversified customer base (nearly 3 million people in 10 states); seasoned, shareholder-friendly management; and, a strong balance sheet.
In addition, WTR offers a superb dividend record: 23 increases in the past 22 years, including during the 2008-2009 crisis. You know a business is solid if they actually increased their payout when the entire financial world seemed to be crumbling.
The stock trades at a 13% discount to its 52-week high, providing a nice entry point for long-term investors.
Dividend Yield: 2.4%.
California Water Service (CWT) is the third-largest publicly traded water utility in the country—and the largest west of the Mississippi River. The company has raised its dividend for 47 years in a row.
On February 26, CWT reported fourth-quarter net income of $5.66 million, a 12% increase over the year-ago quarter. Investors responded well, pushing the water utility stock up almost 2% after the earnings announcement.
However, at a price/earnings ratio of just over 23x earnings, the stock does trade at a slightly richer premium than our other two choices. CWT may be one utility to put on your watchlist.
Dividend Yield: 2.7%
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk “value” approach has won seven “Best Financial Advisory” awards from the Newsletter and Electronic Publishers Foundation.
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