Dividend Investing Ideas Center
Critical Facts You Need to Know About Preferred Stocks
Have you ever wished for the safety of bonds, but the return potential...
This raise represents Aqua America’s 26th dividend increase in the past 25 years.
A smart way to invest in dividend stocks is to look for companies that provide the basic necessities of life. These companies stand a good chance of maintaining, and even growing, their dividends over time, because people will always need their products and services. A great example is the water utility industry.
The best feature of the utility business is that their earnings are virtually guaranteed. In comparison to so many high-flying, speculative stocks that may or may not be around in five years, utilities are almost certain to stand the test of time.
For income investors who love dividends, there are few better places to look than the utility sector. Within utilities, an interesting sub-group could be water utilities. Water is a necessity of human life, which has resulted in steady profits and dividends throughout the sector, for many years. For example, Aqua America (WTR) has performed extremely well for an extended period. The stock price has registered a significant gain over the past year, and has soundly beaten the S&P 500 in that time. In addition, Aqua America recently passed along a solid dividend increase.
Aqua America is one of the largest publicly traded water utilities in the U.S., and it has nearly 3 million customers across several states including Pennsylvania, Ohio, North Carolina, Illinois, Texas, New Jersey, Indiana and Virginia. Aqua America’s growth strategy mostly involves acquisitions. The company has taken part in nearly 200 acquisitions and growth ventures in the last decade, which have allowed Aqua America to extend its reach across many states in America to diversify its customer base and lower its underlying volatility. Customer acquisitions accounted for nearly two-thirds of Aqua America’s revenue growth in 2015. The other key part of Aqua America’s growth strategy is rate increases. Since it operates as a regulated utility, it is able to pass along regular rate hikes, which help provide growth in revenue and earnings.
This has worked very well for the company and its shareholders. Aqua America has consistently grown profits over the past five years.
Last year, Aqua America grew revenue and adjusted operating profit by 4%. Aqua America acquired approximately 17,000 new customers last year, marking the biggest year for customer additions since 2008. It is off to a good start this year as well. Over the first half of the year, Aqua America reported net income of $111.4 million, a 5.1% year-over-year increase. Earnings per share increased 5% over the first six months of the year, compared with the same period last year. Revenue grew slightly, although the bigger factor contributing to earnings growth this year is cost cuts. Aqua America’s operating and maintenance expenses decreased 7.2% last quarter. The company added approximately 5,400 customer connections through acquisitions during the first half of the year. Acquisitions and organic customer additions have fueled 1.1% year-to-date customer growth.
Going forward, customer additions and rate increases should continue to fuel growth. Aqua America management expects another 2% growth in customer base this year – and, so far, Aqua America has received rate hike approvals or infrastructure surcharges in Illinois, North Carolina, Ohio, Texas and Virginia, totaling $5 million. In addition, Aqua America has rate approval requests pending in New Jersey, Indiana and Ohio, which could result in another $10.5 million boost to revenue this year. This is why analysts expect the company to increase earnings per share, by 6% this year and 7% in 2017.
On Aug. 2, the Board of Directors of Aqua America approved a quarterly dividend of $0.1913 per share. The new annualized dividend will be $0.7652 per share, and represents a 7.5% increase over the prior dividend level. The dividend will be payable Sep. 1 to shareholders of record on Aug. 18. This raise represents Aqua America’s 26th dividend increase in the past 25 years. The company has paid uninterrupted cash dividends each quarter for more than 71 years. Following the increase, the annualized dividend rate will be $0.7652 per share. The Board’s stated long-term target dividend payout ratio continues to be in the range of 60% to 70% of earnings from operations. This is a healthy payout ratio for a utility, which should continue to fuel future dividend increases.
The fact that water is a basic necessity of human life gives water utilities a very firm foundation. Aqua America should enjoy rising profits for years to come, which will flow through to investors in the form of higher dividends each year. Water utilities are very interesting investment opportunities, because they share many characteristics with their traditional electric utility peers. Both water and electricity are used in a good economy and a bad one, and due to their regulated businesses, both types of utilities pass on gradual rate increases to their customers, which helps fuel their earnings growth.
At the same time, water utilities are a good alternative within the broader utility sector. Water utilities could be a great way to diversify within utility stocks, while still enjoying the reliable earnings and dividends that utility investors count on. Because of its 2% dividend yield and long track record of dividend growth, income investors should consider buying Aqua America.