American States Water: The Longest Dividend Growth Streak In America

Companies that have consistently increased their dividends over the course of several decades are often some of the most resilient businesses in the market.

Dividend kings are especially popular with income investors because they have boosted their payouts for at least 50 consecutive years.

American States Water (AWR) is a small cap and under-followed dividend king with 63 straight years of dividend increases under its belt, the longest payout growth streak in the U.S.

Let’s take a closer look at American States Water to better understand its competitive advantages, assess how quickly its dividend could grow in the future, and evaluate if today’s valuation makes sense for investors, especially those seeking safe high yield stocks.

Business Overview

Founded in 1929 in San Dimas, California, American States Water is a regional regulated water and electrical utility serving 75 communities in 10 counties in Northern, Coastal, and Southern California.

 

Source: Investor Presentation

It also serves 24,000 electrical customers in San Bernardino county.

The company has three business segments: regulated water, regulated electrical (both under the Golden State Water Company), and its utility services unit, which operates water and wastewater systems on 10 military bases around the U.S. under 50-year contracts.

 

In 2016, approximately 78% of its revenue came from its regulated utilities operations (primarily water), with the remaining 22% coming from American States Utility Services ASUS).

 

Business Analysis

The key to most dividend investments is to buy companies with dependable sales, earnings, and cash flow, and defensible competitive advantages.

In the case of regulated utilities such as American States Water, its moat is inherently wide because the company essentially operates as a government-sanctioned monopoly (i.e. there is no direct or indirect competition in its service territories), but with regulators setting prices and maximum allowed returns on equity and base rates.

In fact, American States Water filed a request with the California Public Utilities Commission (CPUC) in April 2017 for a return of equity and return on base rate (what customers pay) of 9.43% and 8.34%, respectively.

If approved, its prices will become effective starting in January of 2018 and continue providing excellent visibility into the returns the company will get on its capital-intensive investments.

Fortunately for American States Water, management has over 100 collective years of operating in a challenging regulatory environment and getting large scale infrastructure investment projects approved and recouped quickly.

For 2017, that includes $110 million to $120 million in capital expenditures on new utility infrastructure.

 

However, the thing to keep in mind about American States Water, as well as all regulated utilities, is that their business models are inherently slow growing.

 

Source: Simply Safe Dividends

And when it comes to American States Water in particular, the company’s lack of diversification in its core business means that its revenue isn’t as stable as that of larger water utilities such as American Water Works (AWK) or Aqua America (WTR).

This helps explain why the company’s revenue declined in recent years, because California’s five-year drought resulted in water rationing and thus lower demand for AWR’s most important service and region.

Fortunately, the company’s margins and returns on shareholder capital held up well due to the regulated nature of its business.

 

In addition, the end of the California drought, thanks to the past winter’s intense rain and snowfall (and an end to water restrictions), has resulted in sales, earnings, and margins bouncing back very strongly in recent quarters.

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Disclosure: None. 

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