Updated on March 6th, 2023 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 2.4% 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 84 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 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 November 9th, 2022, Global Water reported its Q3–2022 results for the period ending September 30th, 2022. Revenue increased 11.0% year-over-year, from $11.4 million to $11.9 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 homeownership growth state, which explains the consistent organic growth. Global Water had a flat earning per share of $0.07 in the prior year’s quarter to and this quarter.
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.
Source: Investor relations
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.
The company has multiple growth tailwinds. In the fourth quarter of 2021, 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, on November 9, 2022, the Arizona Corporation Commission verbally approved Global Water’s proposed acquisition of Farmers Water Co., a signed order is anticipated to be received by the end of last year.
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 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 2.4%, 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 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 disappointing 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 offers 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 75%. Moreover, thanks to the regulated nature of its 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.
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 2.4%, 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.
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