Many yield hunters are focused on the dividend yield but smart income investors know that what you really want is a company that can grow its dividend year in year for the long term, notes Charles Carlson of DRIP Investor.
Dividend growth should be a factor every investor considers when investing in dividend stocks. And few companies have a record of dividend growth as impressive as American States Water (AWR).
The water utility has boosted its dividend for 58 consecutive years, the latest being a hefty 27% jump in the payout on September 1.
American States Water shareholders haven’t had to settle for just dividends to generate returns on investment. Indeed, the stock has performed well of late, and is trading at its highest level since 2007. Water companies offer a different way to play the utility sector, and American States Water, yielding over 3%, provides a quality play in the group.
Corporate Profile
Headquartered in San Dimas, California, American States Water is the parent of Golden State Water Company, a provider of water services to approximately 256,000 customers.
The company also has a small electricity business, providing electricity services to over 23,000 customers in the Big Bear recreational area of California. The company’s contracted services subsidiary, American States Utility Services (ASUS), provides operations, maintenance, and construction-management services for water and wastewater systems located on military bases throughout the country.
The company is coming off a solid second quarter. Income from continuing operations grew 16%. For 2012, Wall Street is looking for profits of $2.44 per share, up from $2.23 in 2011. Growth should continue in 2013, with Wall Street looking for $2.51.
Those estimates might be conservative, as American States Water beat the consensus earnings estimate in the second quarter by 15 cents per share. The earnings growth should help continue the trend of higher dividends in 2013.
Maintaining a water infrastructure system is fairly capital-intensive, which means American States Water will periodically tap the debt and equity markets to fund capital expenditures. The good news is the firm carries an A+ credit rating from S&P, which allows the company to borrow at a lower rate relative to most of its peers.
Conclusion
Utility stocks have received big support from yield-hungry investors, which has stretched valuations in the group. American States Water trades for 18 times this year’s earnings estimate, a fairly premium valuation.
The company’s growth merits a premium valuation, but the stock is vulnerable to selling pressures should investors migrate from dividend payers to more risky stocks. The stock has traded in the $30s in each of the last three years, so patient investors may be able to take positions a bit cheaper. I would have no problem nibbling at current prices, but would wait for more aggressive buying on dips to the mid-to-upper $30s.
Please note the company offers a direct-purchase plan in which any investor may buy the first share and every share of stock directly from the company. Minimum initial investment is $500.
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