America is facing a severe water crisis; I don’t know how it will be solved, but I do know that when there’s a crisis, governments usually throw money at the problem, suggests Sean Brodrick, editor of Wealth Megatrends — and a participant in The Interactive MoneyShow Virtual Expo, July 26-28. Register here for free.
That brings me to my new recommendation — American States Water (AWR). AWR is the largest water utility in the U.S., with a $3 billion market cap. It delivers water, wastewater and electric services to 3.4 million customers in 14 states.
AWR has a military services group that serves military bases in the U.S., with contracts as long as 50 years. Water utilities are a highly regulated business. But companies can hike rates based on capital spending. And AWR must spend plenty to upgrade its systems. Between 2022 and 2026, the company expects such hikes to boost its earnings per share by 5% to 7% in compound annual growth.
AWR is a Dividend King, having increased its dividends for 67 consecutive years. In fact, it’s raised its dividend nearly 10% per year for the last 10 years. That dividend growth is expected to slow down to 6.5% per year for the next three years, but that’s still great. AWR has a dividend payout ratio of 54.9 so it has plenty of financial room to cover rising payouts.
To be clear, I don’t expect the west’s water crisis to adversely affect AWR. While there could be water rationing in California, I think the bigger issue is the crisis could direct a flood of government money toward fixing the problem, and some of that could fall in AWR’s bucket.
The water crisis in the west should also raise water awareness across the country, which could mean more spending on improvements in states where AWR has a bigger footprint.
Overall, AWR still has a great business model, one that sees it growing its customer base, raising its rates, growing its earnings and raising its dividend.
The utility has sold off hard this year with the rest of the market. It’s in a downtrend; however, it recently put in a bottom (and sure looks like a double bottom). I think this stock is headed much higher, and $105 a share is my target.
