Updated on April 27th, 2022 by Aristofanis Papadatos
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 1.9% dividend yield, so it qualifies as a decent income stock when the broader S&P 500 Index yields only 1.4%. In addition, Global Water pays its dividend monthly instead of quarterly.
Global Water Resources is one of only 49 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, there are multiple positives that make the stock appealing. The outlook for growth is positive for Global Water, given the favorable underlying economics of the water industry.
However, the company’s dividend safety could use a lot of improvement. Given this, we are cautious on Global Water’s prospects as an investment overall.
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 simply 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 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 ~$363 million.
Source: Investor relations
On March 10th, 2021, Global Water reported its Q4–2021 results for the period ending December 31st, 2021. Revenue increased 5.7% year-over-year, from $9.8 million to $10.3 million, once again thanks to organic connection growth, higher water consumption, acquisitions, and higher rates.
The company is tapping into the fragmented state of Arizona, which is currently the U.S.’s fastest home ownership growth state, which explains the consistent organic growth. Global Water switched from a loss per share of -$0.01 in the prior year’s quarter to positive earnings per share of $0.02.
Global Water has been reinvesting the entirety of its profits, maintaining a razor–thin (or even negative) bottom line. To provide a perspective, in the full year 2021, the utility invested $18.3 million in its expansion projects, much more than the $3.6 million it earned in that year. The company’s total active connections increased 10.2% year-over-year, from 48,899 to 53,882, primarily thanks to growth in its service area.
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. As water is an essential commodity, 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: Annual Report
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.
The company has multiple growth tailwinds. In the fourth quarter, Global Water acquired Las Quintas Serenas Water Company and thus added more than 1,100 connections and 2.5 square miles to its service area. Moreover, in January, the company acquired two smaller water utilities in the greater area of Arizona and thus enhanced its connections by 91 and its service area by 9.1 square miles.
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.
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 raises in that time from the initial two cents per share monthly.
The current payout is $0.0246 per share monthly, or $0.2952 per share annually, and has not been affected throughout the coronavirus crisis.
This results in a current yield of 1.9%, which is low for a utility stock. In addition, we are concerned about the safety of the dividend, as Global Water’s earnings haven’t covered the dividend in recent years.
Earnings per share for 2019, 2020 and 2021 came in at just $0.10, $0.05 and $0.16, respectively, whereas the annual dividends were $0.288, $0.288 and $0.292 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 disappoint feature of Global Water. The company has grown its dividend at a 2.1% average annual rate since it became public, six years ago. This growth rate is much lower than the 5-year median dividend growth rate of 5.6% of the utility sector. To cut a long story short, Global Water is offering a much lower dividend yield than the average utility stock and raises its dividend much more slowly than its peers.
On the bright side, we expect the earnings per share of Global Water to recover to $0.40 in 2022. In such a case, the payout ratio would become healthy, at 74%. Moreover, thanks to the regulated nature of its business and the reliable cash flows that result from its business model, Global Water can easily borrow funds to support its dividend for the foreseeable future. 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.
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 expense and maintenance costs keeping a lid on margins, as they have for years.
With the dividend yield at 1.9%, 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.
If you are interested in finding more high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:
- The 20 Highest Yielding Dividend Aristocrats
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 40 stocks with 50+ years of consecutive dividend increases.
- The 20 Highest Yielding Dividend Kings
- The Dividend Achievers List: a group of stocks with 10+ years of consecutive dividend increases.
- 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 Monthly Dividend Stocks List: contains stocks that pay dividends each month, for 12 payments per year.
- The 20 Highest Yielding Monthly Dividend Stocks
- The High Dividend Stocks List: high dividend stocks are suited for investors that need income now (as opposed to growth later) by listing stocks with 5%+ dividend yields.
The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly: