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Dividend King in Focus: American States Water

Published September 13th, 2016 by Ben Reynolds

American States Water (AWR) is a water utility operating in California. The company operates under the name ‘Golden State Water Company’. It serves ~261,000 water customers and ~24,000 electric customers.

The company also operates provides unregulated water utility services business to military bases.  American States Water typically secures 50 year service contracts with these bases.

The image below shows the geographic locations of both the companies Golden States Water Company utility operations in California, and its military business locations across the United States.


Source:  American States Water August 2016 Investor Presentation

American States Water has a long corporate history.  The company was founded in 1929.  Today, American States Water has a market cap of $1.5 billion.

American States Water has been shareholder friendly for a long time.  The company has paid dividends every year since 1931.  It has paid increasing dividends every year… for 61 years.

The company’s dividend history qualifies it to be a Dividend Aristocrat twice over.  American States Water is a Dividend King; a select group of just 18 stocks with 50+ consecutive years of dividend increases.  You can see all 18 Dividend Kings analyzed here.

Keep reading this article to learn more about the investment prospects of American States Water.

Current Events

American States Water’s earnings-per-share grew 9.8% in its most recent quarter (8/3/16).  Earnings-per-share grew from $0.41 in the same quarter a year ago to $0.45 this quarter.

The company’s water utility business was responsible for $0.03 of the $0.04 change in earnings-per-share.  The military business accounted for the other $0.01 increase.

In addition, the company recently announced (7/13/16) that it signed a 50 year contract to operate and maintain water and wastewater systems at Eglin Air Force Base in Florida.  The contract is estimated to have a value of $510 million over 50 years, or $10.2 million a year.  A $10.2 million revenue boost is growth of 2.2% for the company at current revenue levels.

American States Water’s recent events show continued solid results for the company.  Utilities that are able to grow significantly faster than inflation are the exception, not the rule.  American States Water has been an exception for a long time…

Growth Prospects

American States Waters’ growth over the last decade has been impressive:

Again, this is excellent growth for a low-risk utility.  The company’s growth is due to management’s intelligent capital allocation decisions.

The company’s long-term success is a result of the company sticking to what it does best – and expanding very cautiously.

The company’s primary water utility business is a slow grower, but a steady cash generator.  The company uses the cash flows from its water utility business wisely.

The company has 4 options on what to do with its earnings:

  1. Pay dividends
  2. Repurchase shares
  3. Expand water utility business
  4. Expand military contract business

The company currently pays out 56% of its earnings as dividends.  This is about in line with the company’s historical payout ratio.

Remaining earnings are used to grow the business or repurchase shares.  From 2013 through 2015 American States Water reduced its share count by 2.9% a year.  Utilities that repurchase shares are able to add a few extra percentage points to growth through share repurchases.

The company’s military contract business is growing faster than the overall business.  It is also very secure.  There are few businesses that have the dual safety of locking in 50 year contracts, and having a customer that can pay its bills with tax revenue.

The United States military is privatizing many of its bases’ water utility needs. The recent Eglin Air Force Base win is a recent example.

This process is not happening all at once.  Water privatization at military basis will unfold over a long period of time.  According to American States Water’s management, the company has more active bids in progress.

The company has another short-term growth driver over the next 3 years.  American States Water will likely win higher pricing approval from California regulators for the period 2016 through 2018.  The pricing change can be applied retroactively, and is expected to close in the back half of 2016.

Recession Performance

American States Water performed well over the Great Recession.  The company saw earnings-per-share and dividends increase every year from 2007 through 2009.  Looking at the company’s income statement, you wouldn’t have known the global economy was in turmoil.

American States Water’s earnings-per-share over this period are shown below:

Amazingly, even the company’s stock price held relatively constant during the Great Recession, as the image below shows.


Source:  Author, Google Finance

The company’s low volatility during recessions makes it an interesting choice to hold for market panics.

Valuation & 8 Rules Rank

American States Water looks like a buy when one considers its growth prospects, dividend history, and safety.  In short, management has done well to make this an attractive long-term holding.

One thing stands out to dampen my investment enthusiasm over American States Water.

American States Water currently trades for a price-to-earnings ratio of 24.2.  The company’s forward price-to-earnings ratio is 22.5.  This stock would’ve made an excellent purchase in 2010 through much of 2013, when its price-to-earnings ratio was under 17 (and often below 15).

A flight to dividend stocks and safety have increased American States Water’s price-to-earnings ratio.  Low interest rates have also increased this utilities price-to-earnings ratio.

American States Water isn’t extremely overvalued, but it certainly isn’t trading at bargain prices, either.  Given its excellent growth prospects (for a utility) and safety, I believe a fair price-to-earnings ratio for this business is around 20.

American States Water is compared to 185 other businesses with long dividend histories below using The 8 Rules of Dividend Investing so investors can get a sense of how it stacks up to other high quality dividend stocks.

Consecutive Years of Dividend Increases:  American States Water has paid increasing dividends for 61 years.  The company easily passes the test to be included in the Sure Dividend database of having 25+ years of steady or rising dividends.

Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 3.2 percentage points per year.
Source: S&P Factsheet

Dividend Yield:  American States water stock has a dividend yield of 2.3%.  This gives it the 109th highest yield out of 186 businesses in the Sure Dividend database.

Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 2.2 percentage points per year from 1928 to 2013.
Source: Dividends: A Review of Historical Returns

Payout Ratio:  American States Water’s payout ratio of 56% is the 112th lowest out of 186 in the Sure Dividend database.  The company’s reasonable payout ratio gives it a good amount of leeway to continue paying rising dividends, even if earnings fall somewhat.

Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.
Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3

Long-Term Growth Rate:  I expect American States Water to grow earnings-per-share at around 6.5% a year going forward, a bit lower than historical dividend growth – but still much faster than the average utility.  The company’s expected growth rate is the 108th highest out of 186 businesses in the Sure Dividend database.

Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends from 1972 through 2015.
Source: An Economic Perspective on Dividends

Long-Term Volatility:  Despite its stability during the Great Recession, American States Water stock is a bit more volatile than one might expect.  The company’s annualized 10 year average stock price standard deviation is 29.7%.  This is the 107th lowest out of 186 businesses in the Sure Dividend database.

Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011.
Source: Low & Slow Could Win the Race

Final Thoughts

There is no doubt American States Water is a high quality business with a competent management team.  The company does not rank particularly highly using The 8 Rules of Dividend Investing at this time.

American States Water makes a compelling purchase for risk-averse investors – when its price-to-earnings ratio dips into the teens.

Shareholders of American States Water would be wise to hold this high quality business for the long-run.  It will likely continue growing its dividend payments year-after-year at rates faster than the average utility.

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