Updated on October 7th, 2022 by Nate Parsh
California Water Service (CWT) has an amazing track record when it comes to increasing dividends to shareholders. CWT is part of the Dividend Kings, a group of stocks that have raised their payouts for at least 50 consecutive years.
You can see all 45 Dividend Kings here.
You can also download an Excel spreadsheet with the full list of Dividend Kings (plus important metrics such as price-to-earnings ratios and dividend yields) by clicking on the link below:
Impressively, CWT has paid 310 consecutive quarterly dividends.
The Dividend Kings are the “best of the best” when it comes to rewarding shareholders with cash and this article will discuss CWT’s dividend, as well as its valuation and outlook.
CWT is a water stock and is the third-largest publicly-owned water utility in the United States.
CWT was founded in 1926 and has six subsidiaries that provide water to approximately 2 million people in 100 communities, primarily in California but also in Washington, New Mexico and Hawaii.
Just like the vast majority of utility companies, CWT is a slow-growth company. Utilities spend excessive amounts on the expansion and maintenance of their infrastructure and thus they accumulate high debt loads.
As a result, they rely on the regulatory authorities to approve of rate hikes every year. These rate hikes aim to help utilities service their debt but they usually result in modest growth of revenue and earnings. Regulatory authorities have incentive to offer attractive rate hikes to utilities in order to encourage them to invest in infrastructure.
On the other hand, authorities offer limited rate hikes in order to keep customers satisfied. The reliable rate hikes that utilities enjoy result in a resilient business model, which is characterized by fairly predictable cash flows and earnings growth.
This is clearly reflected in the exceptional dividend growth record of CWT. The company has raised its dividend for 54 consecutive years and has a projected payout ratio of just over 50% for 2022.
The most recent quarter was difficult for CWT and the company is expected to see earnings-per-share decline for the year.
California Water Service reported its second-quarter earnings results on July 28th, 2022. Revenue totaled $206 million during the quarter, which was a 3% year-over-year decline. Management explained the second-quarter revenue decline was primarily due to lower customer consumption.
California Water Service generated a net profit–per–share of $0.36 during the second quarter, which was below analyst expectations by $0.20 per share.
The company is projected to earn $1.85 per share in 2022, which would be a 5.6% decrease from the prior year.
As mentioned above, utilities rely on modest rate hikes by regulatory authorities year after year, and thus they are mostly slow-growth stocks.
CWT is not an exception, as it has grown its earnings per share at a ~4% average annual rate over the last decade.
We expect the company to grow its EPS by 5% per year over the next five years. One major driver of earnings growth will be continued rate hikes.
The chart below show that the regulated rate base of CWT is expected to grow by 9.3% per year from 2022-2025.
Source: Investor Presentation
Earnings growth in the long run should be achievable thanks to the rate hikes that are regularly approved by relevant authorities/regulators.
Regulators need to continuously encourage the company to keep investing in the expansion and maintenance of its network.
Customers are dependent on high–quality infrastructure that will remain reliable in the future, which is why future rate increases are more or less a given.
Another growth catalyst for CWT is acquisitions.
This is a common practice for companies in many industries, including utilities, to generate inorganic growth by simply acquiring new customers.
Source: Investor Presentation
As you can see, the company is currently progressing through multiple acquisitions, which will instantly add thousands of new customers.
Overall, we expect CWT to continue to grow its earnings per share at a 5% average annual rate over the next five years, which is slightly ahead of its historical growth rate.
Competitive Advantages & Recession Performance
Utilities invest enormous amounts on the maintenance and expansion of their network. These amounts result in high amounts of debt, but they also form extremely high barriers to entry to potential competitors.
It is essentially impossible for new competitors to enter the markets in which CWT operates. Overall, utilities have the widest business moat investors can hope for.
In addition, while the vast majority of companies suffer during recessions, water utilities are among the most resilient companies during such periods, as economic downturns do not affect the amount of water consumed by customers.
The resilience of CWT was evident in the Great Recession. Its earnings-per-share during the Great Recession are below:
- 2007 earnings-per-share of $0.75
- 2008 earnings-per-share of $0.95 (27% increase)
- 2009 earnings-per-share of $0.97 (2% increase)
- 2010 earnings-per-share of $0.90 (7% decrease)
Therefore, not only did CWT not incur a decrease in its earnings during the Great Recession, but it grew EPS by 20% throughout the 3-year period of 2007-2010.
The exceptional resilience of CWT was also evident in the 2020 economic downturn caused by the coronavirus pandemic. While most companies incurred a material decrease in their earnings during this period, CWT grew its earnings per share by a staggering 50% in 2020..
Put simply, CWT is one of the most resilient companies during recessions and bear markets.
Valuation & Expected Returns
CWT is expected to generate earnings-per-share of $1.85 this year. As a result, the stock is currently trading at a price-to-earnings ratio of 30.3. This is a very high valuation multiple for a utility stock. We consider 20.0 to be a fair earnings multiple for this stock.
Low interest rates are one reason for the elevated valuations of water stocks in recent years, but the Federal Reserve has increased interest rates several times already this year and is likely to do so several more times in the near term. This could put pressure on shares of utility companies.
Investors should pay attention to the valuation of slow-growth stocks, such as utilities. If investors overpay for a utility, the stock may generate years of weak returns.
In this case, the downside risk of CWT is significant whenever the company faces an unforeseen headwind, such as rising interest rates.
If CWT reverts to our assumed fair price-to-earnings ratio of 20.0 over the next five years, it would incur a -8.0% annualized drag in its returns. This could more than offset the positive returns of earnings-per-share growth and dividends.
Another negative aspect of bloated valuations is lower dividend yields. Due to its lofty price, the stock is offering just a 1.8% dividend yield. This is only barely above the average yield of the S&P 500 Index.
Through the combination of expected EPS growth, valuation changes, and dividends, we believe CWT is likely to offer a negative annual return of -1.2% over the next five years.
CWT has exhibited an exceptional dividend growth record, thanks to its reliable earnings growth, which is secured by rate hikes that are approved by regulatory authorities.
In addition, thanks to its healthy payout ratio and its solid business model, the company should easily continue raising its dividend at a mid-single-digit rate for many more years.
While CWT is a “boring” stock, it is exceptionally resilient during recessions. When most companies see their earnings collapse, CWT provides a safe haven to investors.
However, we believe the market has fully priced in future growth (and then some). The stock is likely to offer poor returns over the next five years. As a result, we currently rate CWT stock a sell.
The following articles contain stocks with very long dividend or corporate histories, ripe for selection for dividend growth investors:
- The High Yield Dividend Aristocrats List is comprised of the 20 Dividend Aristocrats with the highest current yields.
- The Dividend Achievers List is comprised of ~350 stocks with 10+ years of consecutive dividend increases.
- The High Yield Dividend Kings List is comprised of the 20 Dividend Kings with the highest current yields.
- The Blue Chip Stocks List: stocks that qualify as Dividend Achievers, Dividend Aristocrats, and/or Dividend Kings
- The High Dividend Stocks List: stocks that appeal to investors interested in the highest yields of 5% or more.
- The Monthly Dividend Stocks List: stocks that pay dividends every month, for 12 dividend payments per year.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500.
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Best DRIP Stocks: The top 15 Dividend Aristocrats with no-fee dividend reinvestment plans.
- The 2022 High ROIC Stocks List: The top 10 stocks with high returns on invested capital.
- The 2022 High Beta Stocks List: The 100 stocks in the S&P 500 Index with the highest beta.
- The 2022 Low Beta Stocks List: The 100 stocks in the S&P 500 Index with the lowest beta
- The Complete List of Russell 2000 Stocks
- The Complete List of NASDAQ-100 Stocks