Aqua America: Cash Flow from Water

10/30/2015 7:00 am EST


Genia Turanova

Editor, Leeb Income Performance

We believe that the stocks in our High-Yield Income portfolio offer a combination of the best that the sector can offer: stable cash flow, higher-than-average dividends, and even some growth, suggests Genia Turanova, editor of Leeb Income Performance.

Aqua America (WTR) holds a unique position in the portfolio. It serves approximately three million people in eight states—Pennsylvania, Ohio, North Carolina, Illinois, Texas, New Jersey, Indiana, and Virginia—providing water and wastewater services.

For many reasons, water presents a compelling investment case; some researchers even argue that this resource is more valuable than oil.

Whatever the actual dollar cost of water, one thing is certain, water is a daily necessity and here lies its attractiveness as an investment.

Aqua America, a regulated utility, is expected to provide stable and sustainable cash flows.

We like it, however, for its aggressive growth stance: since 1995, Aqua America has made more than 300 acquisitions and growth ventures.

From 1999 to 2014, its net income had compounded annual growth of more than 10%, very high for a utility.

In early August, the Aqua America Board of Directors declared a quarterly dividend that represented a 7.9% increase in payout and the 25th dividend increase in 24 years.

Given its relatively low payout ratio, it is expected to continue to increase dividends at or above the level of earnings growth.

The company has capitalized on growth in the number of customers, having added customers in both regulated and market-based businesses, a 0.9% increase in customers that, combined with organic growth, brings its total to a 1.2% increase.

Further, higher surcharges, cases of rate relief, and higher consumption added to the quarter’s positives.

Looking forward, Aqua America plans to invest about $1 billion in capital improvements over the next three years.

Considering its business fundamentals, share valuations (down recently), and its growing dividend, we reiterate our positive recommendation.

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