Income Flows for these Water Utilities

11/17/2016 9:00 am EST

Focus: STOCKS

Ari Charney

Analyst and Associate Editor, Canadian Edge and Personal Finance

Water utilities provide the most essential of essential services, and their status as regulated utilities ensures steady growth and dividends through thick and thin, asserts Ari Charney, income expert and editor of Investing Daily's Utility Forecaster.

With a market cap of $12.8 billion, American Water Works (AWK) is by far the largest publicly traded water utility. It owns and operates water and wastewater facilities in 47 states and Canada.

Despite the apparent geographic diversification, it should be noted that regulated operations in New Jersey and Pennsylvania account for more than 40% of revenue.

American Water has generated steady profits since the downturn, with earnings per share climbing 12.0% annually over the trailing five-year period.

Though the stock yields just 2.1% on a forward basis, AWK boasts a stellar record of dividend growth. The company has grown its payout by nearly 10% annually over the past five years.

The firm’s growth continues to be driven by infrastructure upgrades coupled with a consolidation strategy. It has $6.4 billion of investments planned through 2020, including $600 million of acquisitions.

Management is targeting long-term EPS growth of 7% to 10% annually, which should flow through to the dividend. AWK is a buy below $74.

Like American Water, Aqua America (WTR) is pursuing a growth-via-acquisition strategy. The U.S. water sector is highly fragmented and largely comprised of tiny municipal water systems.

The massive spending needed to upgrade infrastructure will continue to push these entities into the arms of well-capitalized suitors such as Aqua.

Over the past 10 years, the $5.3 billion company has completed nearly 200 acquisitions, and its service territories now cover 3 million people in eight states.

Aqua is planning to spend $1.1 billion over the next three years, which it expects to support ongoing rate-base growth of 6% to 7% annually.

The water utility has grown earnings per share 8.8% annually over the past five years, and analysts forecast earnings growth of 5.5% annually through 2020. With a forward yield of 2.6%, Aqua is a buy below $32.

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By Ari Charney, Editor of Investing Daily's Utility Forecaster

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