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Up to date on October twenty ninth, 2024 by Felix Martinez
American States Water (AWR) has a tremendous monitor document on the subject of paying dividends to shareholders.
AWR is a part of the Dividend Kings, a bunch of shares which have raised their payouts for not less than 50 consecutive years. You possibly can see all 53 Dividend Kings right here.
And, you may obtain the total record of Dividend Kings, plus necessary monetary metrics similar to dividend yields and price-to-earnings ratios, by clicking on the hyperlink under:
Dividend Kings are the “better of one of the best” on the subject of rewarding shareholders with money, and this text will focus on AWR’s dividend, in addition to its valuation and outlook.
AWR has raised its dividend for 70 consecutive years, incomes it the longest dividend development streak within the inventory market. No different firm includes a longer dividend development streak than AWR. For context, the second-longest dividend development streak is Dover Company, that includes 69 years of consecutive annual dividend will increase.
This text will focus on the the explanation why American States Water has maintained such a protracted historical past of regular dividend will increase.
Enterprise Overview
AWR is primarily a regulated water utility enterprise that serves ~263,000 prospects in California. It additionally has a regulated electrical utility enterprise in California and a non-regulated enterprise during which it supplies companies for water distribution and wastewater assortment on 11 army bases within the U.S.
Associated: The 7 Greatest Water Shares To Purchase Now
The regulated water utility enterprise is by far an important division, because it generates ~70% of the corporate’s complete revenues.
Supply: Investor Presentation
Whereas the regulated water enterprise generates most of AWR’s revenues, the non-regulated enterprise that gives companies to water and wastewater techniques on army bases is important as properly. AWR has signed 50-year contracts with the army bases, thus securing a dependable and recurring stream of revenues.
Utility shares are slow-growth firms. They spend huge quantities on increasing and sustaining their infrastructure, accumulating excessive debt hundreds.
Because of this, they depend on the regulatory authorities to approve fee hikes yearly. These fee hikes goal to assist utilities service their debt, however they normally lead to modest income and earnings development.
Authorities have incentives to supply engaging fee hikes to utilities to encourage them to proceed investing closely in infrastructure. Then again, authorities attempt to hold customers happy, in order that they normally supply restricted fee hikes.
AWR is a shiny exception to the rule of gradual development within the utility sector. Up to now decade, the corporate has grown its earnings per share at a median annual fee of seven.6%.
AWR achieved a superior development tempo primarily because of the fabric fee hikes it has obtained from regulatory authorities and its development in its non-regulated enterprise. General, it has a much less “boring” enterprise mannequin than a typical utility firm.
Progress Prospects
American States Water reported second-quarter 2024 earnings at $0.85 per share, a lower from $1.04 per share in the identical interval of 2023. Adjusted earnings per share for Q2 2023, excluding a $0.18 per share adjustment for refunded income, have been $0.86 per share. AWR’s water section recorded diluted earnings at $0.67 per share in Q2 2024, down from $0.91 per share the earlier yr, as a result of elements together with elevated working and provide prices, curiosity bills, and changes in revenues tied to regulatory choices.
As talked about, utilities are usually slow-growth shares as a result of lackluster fee hikes they obtain from regulatory authorities in trade for his or her hefty capital bills. AWR is superior to most utilities on this facet, because it has loved an distinctive 10.5% common annual fee hike in its regulated water enterprise in recent times.
Supply: Investor Presentation
This has helped the corporate develop its earnings per share at a 7.6% common annual fee over the past decade, which is without doubt one of the highest development charges within the utility sector.
Furthermore, because of its optimistic efficiency, resilience to macroeconomic headwinds, and shiny outlook, AWR raised its dividend by 8.3% this yr. That is above the everyday dividend development fee of utility shares.
AWR has now grown its dividend for 70 consecutive years. The corporate’s 10-year dividend-per-share CAGR stands at a passable 9.2%.
It’s also outstanding that administration has set a objective of elevating the dividend by greater than 7% per yr on common over the long run.
Supply: Investor Presentation
Such a excessive dividend development fee is uncommon within the slow-growth utility sector, making the inventory’s 2.2% dividend yield considerably extra engaging.
Furthermore, AWR has a markedly robust stability sheet and an A+ credit standing, one of many highest within the utility trade.
Due to its wholesome payout ratio of ~61%, robust stability sheet, and sustained development, AWR has a very good likelihood of delivering its formidable objective of greater than 7% annual dividend development to its shareholders.
Going ahead, AWR is more likely to proceed rising at a significant tempo because of fee hikes in its water utility enterprise. As well as, because of the extremely fragmented standing of the water utility enterprise, AWR can even develop by buying small firms.
Aggressive Benefits & Recession Efficiency
Utilities make investments extreme quantities in sustaining and increasing their networks. These investments lead to excessive debt, however additionally they kind impenetrable limitations to entry for potential rivals.
It’s primarily not possible for brand new rivals to enter the utility markets during which AWR operates.
Even in its non-regulated enterprise, AWR enjoys weak competitors because of the 50-year length of its contracts.
As well as, whereas most firms undergo throughout recessions, utilities are among the many most resilient firms throughout such intervals, as financial downturns don’t have an effect on water and electrical energy consumption.
The resilience of AWR was outstanding within the Nice Recession. Its earnings-per-share throughout the Nice Recession are as follows:
2007 earnings-per-share of $1.56
2008 earnings-per-share of $1.49 (4% lower)
2009 earnings-per-share of $1.61 (8% improve)
2010 earnings-per-share of $1.66 (3% improve)
Subsequently, AWR remained resilient throughout the Nice Recession, managing to develop its earnings per share by 6% between 2007 and 2010.
AWR’s resilience was additionally evident in 2020, as the corporate nonetheless managed to develop earnings per share regardless of the deep financial downturn attributable to the coronavirus pandemic.
AWR is without doubt one of the most resilient firms throughout recessions and bear markets. This resilience is essential because it helps the inventory’s long-term returns and makes it simpler for shareholders to retain the inventory throughout broad market sell-offs.
Valuation & Anticipated Returns
We count on AWR to generate earnings-per-share of $3.03 this yr. Because of this, the inventory is at present buying and selling at a price-to-earnings ratio of 27.3. We think about 25.0 to be a good earnings a number of for this inventory.
The fairly wealthy price-to-earnings ratio, which has been sustained over time, could be attributed, not less than partly, to the depressed rates of interest over the previous decade.
When rates of interest are low, income-oriented buyers have an issue figuring out engaging yields available in the market. Thus, they view the dividend yields of utilities as extra engaging. Because of this, utility inventory costs profit from suppressed rates of interest.
Surprisingly, even with rates of interest now on the rise, AWR has retained a steep valuation premium. We consider this is because of buyers flocking to the corporate’s recession-proof money flows, predictable development avenues, and wonderful monitor document of shareholder worth creation, which the corporate has confirmed it could possibly ship even throughout the harshest market environments.
Nonetheless, no person can assure this can stay the case indefinitely. The inventory may simply be priced decrease if buyers get up to the belief that it trades at an extreme valuation a number of. Subsequently, we see the potential for the P/E a number of to contract transferring ahead.
If AWR reaches our assumed honest price-to-earnings ratio of 25.0 over the subsequent 5 years, its earnings a number of will contract, decreasing its annual returns by -6%.
Furthermore, AWR is at present providing a 2.2% dividend yield. We additionally count on the corporate to develop its earnings per share at a 5.7% common annual fee over the subsequent 5 years.
Placing all of it collectively, AWR is more likely to obtain annual returns of 1.9% via 2028.
Last Ideas
AWR is way more attention-grabbing than the typical utility inventory because it has some distinctive traits.
During the last decade, it has grown its earnings per share at a excessive single-digit annual fee. That is significantly better than the low development charges of most utilities.
As well as, AWR’s enterprise features a non-regulated section, which supplies recurring income for 50 years and presents vital development potential.
Nonetheless, as a result of market’s excessive utility of all AWR’s virtues, shares may very well be overvalued at their present ranges. With a reasonable five-year anticipated complete return potential, AWR inventory receives a “maintain” score.
The next articles include shares with very lengthy dividend or company histories, ripe for choice for dividend development buyers:
Thanks for studying this text. Please ship any suggestions, corrections, or inquiries to help@suredividend.com.
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