Water is necessity for life, making it one of the most valuable resources on the planet. Demand for water is always present.
Because of this, the companies that are exposed to water have a wide moat around their businesses, which allows for these names to see highly consistent results. In turn, this paves the way for dividends.
This article will examine three of our favorite water stocks that have strong dividends, competitive advantages, and long-term growth potential, including:
- American States Water Company (AWR)
- The Gorman-Rupp Company (GRC)
- SJW Group (SJW)
American States Water
Our first name for consideration is American States Water. The company is composed of two segments, including Utilities, which is mostly water-related and some electricity, and Services, which provides wastewater services on several U.S. military bases.
American States Water’s regulated water utility business is based in California, which gives the company exposure to the largest state in the country. The company provides water services to approximately 263,000 customers spread over 80 communities in 10 counties in the state. Nearly 70% of revenue comes from this segment.
The company does operate in a regulated industry, but rate hikes have averaged more than 11% recently.
The smaller Services business is highly important as well. American States Water has agreements for water distribution and wastewater collection on 11 military bases. These agreements are for 50 years, giving American States Water a reliable recurring stream of revenue for decades to come.
Though utilities are often considered slow growth, American States Water has increased its earnings-per-share by almost 9% annually over the last decade.
This has enabled high levels of dividend growth, at least for a utility company. The 10-year CAGR for the dividend is just above 9%. American States Water has increased its dividend for 68 consecutive years, which qualifies the company as a Dividend King and is one of the longest dividend growth streaks in the market. The expected payout ratio for the year is just 65%, a very reasonable level for a utility company. American States Water yields 1.7%.
Our second water stock to consider is Gorman-Rupp, which is a niche manufacturer of critical systems used by industrial companies use to run their facilities.
Gorman-Rupp is a very small company with a market capitalization of just $721 million. Even so, the company holds a place of crucial importance for many of its industrial customers because without its products, basic functions could not be completed. Gorman-Rupp’s products are relied upon by a variety of end markets, including HVAC, agriculture, construction, fire protection, military, original equipment, petroleum, water, and wastewater.
Gorman-Rupp is a diversified business. The water-related businesses are the most important, accounting for nearly 60% of revenue, but even here the company still has varied sources of revenue. Fire suppression is the largest source of revenue, but accounts for just about a quarter of the total.
Gorman-Rupp should see steady growth moving forward due to the state of infrastructure in the U.S. It is estimated that it will take as much as $2.6 trillion to address the updating of water, wastewater, and flood control systems over the next 10 years.
Earnings growth overall has been slower at just over 2% per year since 2012, but the company has raised its dividend for 50 consecutive years. The dividend has a CAGR of almost 9% during this period and the projected payout ratio is 70%. Shares yield 2.5%.
Our final top pick for water stocks is SJW Group, a company that is engaged in every step of the water process.
SJW Group produces, purchases, stores, purifies, and distributes water to its customers. The company has a presence in a variety of high growth areas, including Silicon Valley and the area north of San Antonio, Texas. SJW Group also has a small real estate division that owns and develops properties for residential and warehouse customers in California and Tennessee.
The purchase of Connecticut Water on October 9th, 2019 added Connecticut and Maine to the company’s areas of operation and made SJW Group the third largest publicly traded water utility. Prior to this acquisition, California was responsible for nearly all of annual revenue. Now, the state contributes 60% of annual revenue, an elevated percentage, but to a less extreme degree.
SJW Group has a more diversified business model, allowing it some protection if a certain region were to face challenges. The combined company has almost 400,000 service connections and provides services to 1.5 million people. Growth in water rates have been solid companywide, including 5.2% for the prior year.
SJW Group’s earnings-per-share grew with a CAGR of 6.2% over the last decade, which helped the dividend to nearly double. Overall, SJW Group has a 54-year dividend growth streak, which should continue given that the forecasted payout ratio is 61% for the year. The stock offers a yield of 1.8%.
Water is needed daily by all consumers, which gives water utility companies an incredibly high customer pool from which to service. Constant, steady demand provides tailwinds that allow for companies in the industry to provide annual dividend increases.
American States Water, Gorman-Rupp, and SJW Group are three such companies as they all have had steady growth that has corresponded with dividend increases. Each of these companies has at least five decades of dividend growth and enjoys competitive advantages that should result in future dividend increases as well.
Therefore, we believe that investors looking for steady dividend growth over the long-term should consider adding these names to their portfolio.
Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.
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