Aqua America Inc: The Most Overlooked Dividend Aristocrat?
27 Consecutive Years and Counting of Dividend Increases
For income investors, few things are better than a steadily growing stream of dividends. And that’s why in the stock market, there is a very special group of companies that deserve your attention: the S&P 500 Dividend Aristocrats.
To put it simply, S&P 500 Dividend Aristocrats are S&P 500 companies that have increased their dividends every year for at least 25 years.
As of July 2018, only 53 of the S&P 500 companies have earned the “dividend aristocrat” title. Many of them are familiar names to consumers, such as The Coca-Cola Co (NYSE:KO), Procter & Gamble Co (NYSE:PG), and Walmart Inc (NYSE:WMT).
Today, though, I would like to show you a much lesser known member of the S&P 500 Dividend Aristocrats club: Aqua America Inc (NYSE:WTR).
Headquartered in Bryn Mawr, Pennsylvania, Aqua America Inc is a water and wastewater utility company. It currently serves around three million customers in Texas, New Jersey, Ohio, Pennsylvania, Indiana, Illinois, Virginia, and North Carolina.
As of December 31, 2017, Aqua America’s infrastructure network consisted of over 12,000 miles of water mains, 21 surface water filtration plants, 187 wastewater treatment plants, more than 800 water storage tanks, and around 3,300 wells and 1,100 vehicles. (Source: “Investor Presentation,” Aqua America Inc, May 9, 2018.)
In the water utility business, Aqua America serves around one percent of the U.S. population. In the wastewater business, its presence is even smaller, at 0.1%.
WTR Stock Offers Reliable and Increasing Dividends
Unless you live in one of Aqua America’s operating regions, the company name probably doesn’t sound familiar. Still, despite its relatively small presence in the industry, the company has provided investors with one of the safest income streams through its dividends.
Aqua America has raised its payout every year for the past 27 years, meaning it has earned the title of dividend aristocrat. And if you look a bit further back, you would see that the company has been paying uninterrupted quarterly cash dividends for more than 73 years. (Source: “Dividend History,” Aqua America Inc, last accessed July 23, 2018.)
Because dividend aristocrats are usually well-established businesses, their dividend growth may slow down due to having already captured a large portion of their target markets. But that’s not really the case for WTR stock. Despite paying dividends through thick and thin for decades, the company is still raising its payout at quite an impressive pace.
Consider this: in 2012, the company paid an annualized dividend of $0.56 per share. By 2017, that amount had grown to $0.8188 per share, with a compound annual growth rate (CAGR) of 7.9%. (Source: Aqua America Inc, May 9, 2018, op cit.)
The latest dividend hike came last week, when Aqua America’s board of directors declared a quarterly cash dividend of $0.2190 per share. This is a seven-percent increase from the company’s previous payment. (Source: “Aqua America Declares 7 Percent Dividend Increase,” Aqua America Inc, July 20, 2018.)
Trading at $36.38 apiece, WTR stock offers an annual dividend yield of 2.4%.
Aqua America Inc Is a Growing Business
Despite operating in a relatively boring industry for quite some time, this water and wastewater utility company still manages to churn out decent growth rates.
The chart below shows Aqua America’s adjusted income from continuing operations per share in each of the last five years.
Adjusted Income From Continuing Operations Per Share
As you can see, the company’s adjusted earnings per share has been consistently increasing. From $1.15 in 2013 to $1.35 in 2017, the amount went up every year by a total of 17.4%.
Growth has continued in the current year. In the first quarter of 2018, Aqua America generated $194.3 million in revenue, marking another 3.5% increase year-over-year. Net income came in at $0.29 per share, a 3.6% improvement from the first quarter of 2017. (Source: “Aqua America Reports Financial Results for Q1 2018,” Aqua America Inc, May 8, 2018.)
For those who are concerned about this dividend grower’s payout safety, note that Aqua America’s earnings of $0.29 per share provided more than sufficient coverage of its quarterly dividend payment of $0.2047 per share.
One of the reasons behind the company’s improving financials was its “growth through acquisition” strategy. Over the last 10 years, Aqua America has made nearly 200 acquisitions. In the first quarter of this year, the company added three water and wastewater systems to its network through acquisitions, gaining 448 customer connections.
More Dividend Hikes to Come
In the company’s latest earnings report, management reaffirmed their guidance. For full-year 2018, they expect Aqua America to generate total customer growth of between two and three percent and earn a net income of between $1.37 per share and $1.42 per share.
If the company achieves the midpoint of its guidance range and earns $1.395 per share, its expected dividend payment of $0.8474 per share for the year would mean a payout ratio of just 60.7%, leaving a wide margin of safety.
And since Aqua America has been raising its dividends for over two decades, management will definitely want to continue that track record. Adding in its growing financials and conservative payout ratio, I’d say the best could be yet to come for WTR stock investors.