Updated on September 18th, 2024 by Felix Martinez
Utilities are very popular among income investors. Their steady revenue and earnings provide a stable base from which the companies can pay excess capital to shareholders. This tends to lead to reasonably high dividend yields and safe payouts, both of which are attractive for investors seeking current income.
Global Water Resources (GWRS) is a water utility based in Arizona that went public in 2016. It has a 2.3% dividend yield, so it qualifies as a decent income stock when the broader S&P 500 Index yields only 1.6%. In addition, Global Water pays its dividend monthly instead of quarterly.
Global Water Resources is one of only 78 monthly dividend stocks we cover. You can download our full list of monthly dividend stocks (along with price-to-earnings ratios, dividend yields, and payout ratios) by clicking on the link below:
Despite the low current yield, the stock has multiple appealing features. Given the favorable underlying economics of the water industry, Global Water’s outlook for growth is positive.
However, the company’s dividend safety could use improvement. Given this, we are cautious about Global Water’s prospects as an investment overall.
Business Overview
Global Water Resources is a water resource management company. It owns, operates, and manages water, wastewater, and recycled water utilities in Phoenix, Arizona. The company’s strategy is called total water management, which means it wants to own the entire water cycle.
In essence, this is operating water, wastewater, and recycling facilities in the same geographic area to conserve water but also maximize the economic value of water by owning the entire life cycle. The company focuses on communities where it expects population growth but also where it expects water demand to exceed supply.
Global Water owns 25 water and wastewater utilities in Phoenix and serves more than 74,000 people. It also recycles more than 1 billion gallons of water every year. The company believes it has the capacity for hundreds of thousands of service connections, but its current scale is quite small.
Annual revenue is about $42 million, and the stock trades with a market capitalization of ~$300 million.
Source: Investor relations
On August 7, 2024, Global Water released its Q2 results for the period ending June 30, 2024. Revenues increased by 3.9% year-over-year to $13.5 million, mainly due to a 4.9% organic growth in active water and wastewater connections, though there was a slight drop in overall consumption.
Earnings per share (EPS) remained steady at $0.07, as operating expenses rose by 7% to $10.7 million, offsetting the revenue growth.
Global Water continues to benefit from Arizona’s rapidly growing homeownership market, driving consistent organic growth. The company is also pursuing acquisitions and expects further growth in connections and rates.
Growth Prospects
The strategy behind Global Water’s asset base makes sense; areas with population growth and relatively scarce water supplies should see ever-rising demand for water. Global Water is well-positioned to grow in such areas.
The utility has many tailwinds, including considerable growth in its recycled water deliveries (9.0% growth year-over-year), massive rate increases (requested 13.4% rate increase through 2022), and the solid population growth in Phoenix (21.7% since 2010).
Its regulated annual revenues have been growing consistently over the years. During the last decade, the company has grown its revenues at a 2.5% average annual rate. Water is an essential commodity, so its consumption is resilient even under the most adverse economic conditions. As a result, the revenues of Global Water should remain resilient during a potential recession, as was the case during the Great Recession.
Source: Investor relations
We expect organic growth contributions from rate increases, which amounts to another low-single-digit gain annually, on average. Like other utilities, Global Water is able to pass through approved pricing increases to its customers, which is a steady, long-term tailwind to revenue.
Overall, thanks to material rate hikes and the sustained expansion of Global Water, we expect the utility to grow its earnings per share at a 6.0% average annual rate over the next five years.
Dividend Analysis
Water stocks are prized for their stable dividends and consistent dividend growth. Global Water has paid a monthly dividend since May of 2016, with a handful of monthly raises from the initial two cents per share.
The current payout is $0.0248 per share monthly, or $0.30 per share annually, and was not affected throughout the worst of the coronavirus crisis.
This results in a current yield of 2.3%, which is low for a utility stock. In addition, we are concerned about the dividend’s safety, as Global Water’s earnings haven’t covered the dividend in recent years.
Earnings per share for 2021, 2022, and 2023 came in at just $0.15, $0.30, and $0.26, respectively, whereas the annual dividends were $0.29, $0.30, and $0.27 in those years. In other words, Global Water paid out much higher dividends than its earnings during that period. This means that the company has a significant shortfall and must fund the payout through other means, including debt and share issuances.
The dividend growth rate is another feature of Global Water. The company has grown its dividend at a 6.8% average annual rate since it became public, eight years ago. This growth rate is higher than the 5-year median dividend growth rate of 5.6% of the utility sector.
On the bright side, we expect Global Water’s earnings per share to recover to $0.30 in 2024. In such a case, the payout ratio would be 100%. Moreover, thanks to its regulated business and the reliable cash flows resulting from its business model, Global Water can easily borrow funds to support its future dividend. Nevertheless, given the recent years of maintaining a payout ratio well above 100%, the dividend should not be considered entirely safe in the long run.
Final Thoughts
We think Global Water has a positive road ahead when it comes to earnings growth. Given the multiple sources of organic growth, the company is in a reliable revenue growth trajectory. However, we also see rising interest expenses and maintenance costs keeping a lid on margins, as they have for years.
With the dividend yield at 2.3%, we see the risk of owning the stock as far outweighing the reward. Despite the merits of receiving dividends on a monthly basis, we do not recommend purchasing the stock of Global Water Resources.
Don’t miss the resources below for more monthly dividend stock investing research.
- The Monthly Dividend Stocks List
- 20 Highest Yielding Monthly Dividend Stocks
- 10 Cheapest Monthly Dividend Stocks
- 10 Safest Monthly Dividend Stocks
- 3 Top ‘Hold Forever’ Monthly Dividend Stocks
And see the resources below for more compelling investment ideas for dividend growth stocks and/or high-yield investment securities.
- Dividend Kings: 50+ years of rising dividends
- Dividend Champions: 25+ years of rising dividends
- Dividend Aristocrats: 25+ years of rising dividends and in the S&P 500
- Dividend Achievers: 10+ years of rising dividends and in the NASDAQ
- High Dividend Stocks: 4%+ dividend yields
- Blue Chip Stock: Kings, Aristocrats, and Achievers
- MLPs: List of MLPs and more
- REITs: List of REITs and more
- BDCs: List of BDCs and more