In this special 5-part series of articles, Bob Ciura counts down his current five top "Buy & Hold Forever" dividend stocks. The editor of Sure Dividend continues his review with a look at SJW Group (SJW).
SJW Group is a Dividend King with a solid yield, consistent dividend growth, and high expected returns in the coming years. The company was founded in 1866 and was initially known as the San Jose Water Company. SJW is a water utility company that purchases, stores, purifies, and distributes water to consumers and businesses.
San Jose Water Company, a regulated utility, has nearly 230,000 connections and provides water to roughly one million customers in the Silicon Valley area. The purchase of CTWS added 138,000 connections and 450,000 customers in Connecticut and Maine.
Growth Prospects
Earnings-per-share growth over the past 10 years is just 0.6%, but this accelerates to 15.1% for the past five years, an impressive growth rate for a water utility. Much of this growth is due to the merger with CTWS.
A key competitive advantage for SJW Group is that it operates in two areas, Silicon Valley and Central Texas, that have seen high levels of population growth in recent years. These areas need improved water infrastructure to serve a growing client base, so local governments often allow the company to raise rates at a relatively high level in order to fund these projects.
For example, the company applied for rate increases of 9.8%, 3.7%, and 5.2% over the next three years for its California service areas. We continue to forecast that the SJW Group will grow earnings at the average growth rate of 8% through 2029 due to revenue growth and rate increases.
Valuation & Expected Returns
Future returns will consist of the stock’s EPS growth, changes in the valuation multiple, and dividends. SJW stock now trades for 21.7 times our EPS estimate for this year of $2.73. With the price-to-earnings ratio below our long-term fair value estimate at 26, the rising P/E multiple could add 3.7% to annual returns over the next five years.
Lastly, SJW has increased its dividend for 56 consecutive years and the stock recently yielded 2.7%. \As a result, total returns could reach 14.4% per year over the next five years, making SJW a buy.
