The average human body is generally made up by a considerable amount of water – usually more than 50% of your weight is water.
Water is at the heart of all we do. Without water, a human being cannot survive.
So you could argue that water is more important than oil, gold, or pretty much anything else out there.
Why care about this? I’ll tell you why: because there’s a good chance you can profit with this information.
What if I told you there was a company out there providing water, electricity and wastewater services to thousands of people, and profiting handsomely because of it?
Wouldn’t you want to profit from that as well?
Well, American States Water Co. (AWR) is such a company.
They’ve been providing valuable water services to thousands of customers for decades, and shareholders have profited handsomely.
AWR has claimed in past annual reports that water is more valuable than gold, and I can’t say I disagree.
If you found yourself stranded on a deserted island, which would you rather have: gold or water?
American States Water Co. (AWR) provides operations, maintenance, and infrastructure services for water and wastewater services. They also provide regulated electricity utility services.
The company operates in three segments: Golden State Water Company – Water Utility (68% of FY 2013 revenue); American States Utility Services, Inc. (24%); Golden State Water Company – Electric Utility (8%).
Think of how many people are being born every single day. The Earth’s population is rapidly expanding all the time. So you have an increasing demand for water not only for personal use, but also for industrial use. Water is used in almost everything we do. Yet, the amount of water in the world today is the same as it was billions of years ago. So you have more and more people, yet the commodity necessary to sustain life isn’t increasing.
As such, you have to like the idea of investing in companies that control water supply and usage. That’s where an investment in AWR comes in.
This business has grown at a comfortable rate over the last 10 years, though big growth rates isn’t what an investor is seeking when looking at a water utility. Rather, one is looking for stability and low risk, which is what AWR offers. Their fiscal year ends December 31.
Revenue has grown from $228.005 million in FY 2004 to $472.077 million in FY 2013. That’s a compound annual growth rate of 8.47%, which is pretty strong.
Earnings per share improved from $1.18 to $1.61 during this same time frame, which is a CAGR of 3.61%. This lower growth appears largely due to the issuance of new shares during this time frame. AWR continues to make investments in its infrastructure.
But check this out: American States Water has raised its dividend for 60 consecutive years. That’s simply phenomenal, and puts it in extremely rare company; only two companies can lay claim to such longstanding dividend growth streaks. As such, this means AWR is a “Champion” on David Fish’s Dividend Champions, Contenders, and Challengers document, which tracks more than 500 stocks with at least five consecutive years of dividend raises.
And it gets better. AWR hasn’t just given token raises to appease shareholders and keep their streak alive. No, they’ve actually meaningfully raised their dividend over the last decade. Over the last 10 years, they’ve increased their dividend by an annual rate of 5.6%. Meanwhile, the payout ratio is fairly low, at 55.3%. That means the company retains almost 44.7 cents for every dollar in profit to continue to grow the business and maintain the infrastructure. That’s a pretty healthy ratio.
The current yield of 2.76% is pretty attractive right now, especially considering the safety and stability of this stock.
Looking at the balance sheet shows a well-managed firm.
The long-term debt/equity ratio is fairly healthy, at 0.66. And the interest coverage ratio stands at 5.4, which means interest expenses can be covered just fine for the foreseeable future.
Profitability looks surprisingly strong. Net margin ended last year at 13.28%, which is quite strong for a utility that operates under heavy regulations. And return on equity ended 2013 at 12.7%.
I’ve said before I like to invest when odds are on my side. That’s basically what you see when you look at my entire portfolio. I invest in companies with easily understood business models, lengthy track records of earnings and dividend growth, and great odds that their products and/or services will be in strong demand for the next 10 years and beyond. And what could possibly be in more demand than water?
Try living without water for just one week and see how far you get. Water is necessary for life, and yet we have to work with the same amount of water that we’ve always had. So when you have more people clamoring for a limited product that means demand goes up. And when demand goes up, prices naturally do as well. And that’s where I, as an investor, see opportunity.
AWR shares are trading for a price-to-earnings ratio of 20.17 right now, which seems a bit pricey. I typically like to invest when the P/E is below 15, as that’s a general gauge for fair value, but AWR typically trades at a premium. The five-year average P/E ratio is 18.6, though the current price is even above that.
I valued shares using a dividend discount model analysis, using a 10% discount rate and a 5.5% growth rate. I used a low growth rate to act as a margin of safety, though that’s still above the rate at which earnings per share have grown over the last decade. This gives me a fair value on shares of $19.97. Shares look a bit pricey here, but this utility could also grow at a faster rate in the future than what I anticipate. And that’s certainly reasonable considering their prospects.
Bottom Line: American States Water Co. (AWR) provides one of the most valuable products in the entire world: water. More and more people will need ever greater supplies of water in the future, and so it makes sense to have some exposure to high-quality water companies with longstanding track records of rewarding shareholders with rising dividends as a portion of rising profits. And with 60 consecutive years of dividend raises, AWR is one of the surest bets out there.
— Jason Fieber