Profits Flow for Aqua America

02/21/2014 7:00 am EST


David Dittman

Chief Investment Strategist, Australian Edge, Canadian Edge, & Utility Forecaster


Our latest spotlight growth stock idea is among the highest-quality water utilities in the US, observes David Dittman, editor of Utility Forecaster.

Aqua America (WTR) has strong fundamentals, including a growing rate base, solid relations with regulators, a disciplined and effective approach to mergers and acquisitions in a still-fragmented industry, relatively low-risk earnings, and a consistently growing dividend.

Aqua reported net income of $63.6 million, or $0.36 per share, for the third quarter of 2013, up from $50.7 million, or $0.29 per share, for the prior corresponding period. Revenue was off by 4.8% on unfavorable weather comparisons.

Management estimated a revenue loss of approximately 6% from lower consumption, due to high rainfall, though acquisitions and surcharges mitigated this impact somewhat, as did cost controls.

Aqua completed 14 tuck-in acquisitions during 2013, driving customer growth of approximately 1.5%. Aqua's Marcellus Shale joint venture partner PVR Partners LP is being acquired by Regency Energy Partners LP.

The combined company will have more capacity to expand gas infrastructure in the region, and more infrastructure should provide more opportunities for future water sales, as drilling activity increases.

The payout ratio for the 12 months ended September 30, 2013, was 51.1%, which leaves room for significant growth.

Management's policy payout ratio range is 60% to 70%. Getting to that level implies 9% compound annual dividend growth, from 2014 through 2017.

Aqua America, like all water utilities, has substantial infrastructure replacement needs. But it has to balance CAPEX recovery with manageable rate increases; earnings and rate-base growth should provide sufficient operating cash flow to fund investments and dividends over the next four years.

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