Updated on July 9th, 2021 by Bob Ciura
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 nearly 2% dividend yield, so it qualifies as a decent income stock when the broader S&P 500 Index yields only 1.3%. In addition, Global Water pays its dividend monthly instead of quarterly.
Global Water Resources is one of only 51 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.
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 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 more than1 0 12 water and wastewater utilities in Phoenix and serves more than 61,000 people. The company believes it has capacity for hundreds of thousands of service connections, but its current scale is quite small.
Annual revenue is about $40 million, and the stock trades with a market capitalization of ~$400 million.
Source: Investor relations
On May 5th, 2021, Global Water reported its Q1–2021 results for the period ending March 31st, 2021. Revenue increased 12.5% year-over-year to $9.3 million, once again due 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. EPS came in at a loss of ($0.01) compared to positive EPS of $0.02 in the same quarter last year.
Global Water has been reinvesting the entirety of its profits, maintaining a razor–thin (or even negative) bottom line. The company’s total active connections increased by 8.5% to 50,162 year-over-year, primarily due to growth in its service areas.
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 do that.
Global Water has many tailwinds including considerable growth in its recycled water deliveries (8.3% growth YoY), massive rate increases (requested 13.4% rate increase through 2022), and the solid population growth in Phoenix (17.8% since 2010).
Its regulated annual revenues have been growing rapidly over the years. Due to water being a necessary commodity whose consumption is mostly uncorrelated to the events affecting the overall economy, revenues should remain resilient during a potential recession, as was the case during the Great Recession.
Source: Annual Report
We can see 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 first quarter, Global Water entered into a master utility agreement with Nikola Corporation (NKLA) to provide water and wastewater services to its new manufacturing plant in Coolidge, Arizona.
It also signed agreements to acquire two small water utility companies, Twin Hawks Utility and Rincon Water Company, continuing its reinvestment/expansionary strategy.
Putting all of this together, we expect 6% annual EPS growth for Global Water 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 raises in that time from the initial two cents per share monthly.
The current payout is $0.0243 per share monthly, or $0.2916 per share annually, and is continuing to be paid through the current COVID-19 impacted environment.
This results in a current yield of 1.7%, which is low for a utility stock. And, we are concerned about dividend safety because Global Water’s earnings haven’t covered the dividend in recent years.
Earnings for 2018 and 2019 came in at just $0.15 and $0.10, respectively, and proceeded to drop further to $0.05 per share in 2020. As a result, Global Water paid out much higher dividends that exceeded its EPS during that period. That means it has a significant shortfall and must fund the payout through other means, including debt and share issuances.
That said, we expect EPS to recover to $0.40 in 2021, which would cover the annualized dividend payout. Assuming another steep economic downturn, we believe the dividend should be sustainable. However, given the recent years of maintaining a payout ratio well above 100%, there is no guarantee of this.
Final Thoughts
We think Global Water has a positive road in front of it when it comes to earnings growth. We believe revenue growth is all but assured given the sources of organic growth the company possesses. However, we also see rising interest expense and maintenance costs as keeping a lid on margins, as it has for years.
With the dividend yield below 2%, we see the risk of owning the stock as far outweighing the reward. Despite its attractive monthly payouts, we do not recommend Global Water Resources stock.