Throughout our series of articles on dividend aristocrats, several stalwarts have been highlighted, including Dover (DOV), the equipment and component manufacturer with 68 straight years of dividend increases, and Procter & Gamble (PG), the global consumer goods conglomerate with a 67-year streak of consistent payout hikes. In this article, let's look closer at the company boasting an even more remarkable dividend track record: American States Water (AWR, Financial). With an astonishing 69 consecutive years of dividend growth, American States Water possesses one of the longest streaks of annual payout increases on record.
Boring but predictable and steady growth
American States Water is serving more than 263,200 water customers and more than 24,700 electric customers, operating in three main business segments: Water, Electric and Contracted Services. Over the past two decades, American States Water has seen steady, consistent growth in key financial metrics. Specifically, from 2002 to 2022, the company's revenue grew from $208.36 million to $491.53 million, representing an annual compounded growth rate of 4.36%. Operating income rose at an even faster pace over this period, increasing from $50.6 million in 2002 to $134.15 million in 2022, reflecting a nearly 5% annual compounded growth rate. This gradual but reliable expansion highlights the stability and resilience of American States Water's operations over the long run. While not flashy, the company has demonstrated its ability to grow both top-line revenue and bottom-line profits consistently for shareholders.
A 69-year dividend growth journey
American States Water has an impressive 69-year record of consecutive dividend increases, highlighting its commitment to returning value to shareholders. In line with the company's steady growth, dividends have risen at a consistent pace from $0.44 per share in 2002 to $1.53 per share in 2022, representing a compound annual growth rate of 6.43%. American States Water has increased its dividend at an accelerated pace in recent years, with dividend growth averaging 9.4% from 2018 to 2023. The company aims to target a long-term dividend growth rate of more than 7% going forward.
The payout ratio has remained reasonable for 19 of the past 20 years, fluctuating between 44.56% and 78.42% of earnings paid out as dividends. The one exception was 2003, when the payout ratio spiked to nearly 113%, implying dividends exceeded earnings that year. While slightly concerning, this appears to be an anomaly rather than the norm for American States Water, given its otherwise prudent approach to dividend growth tied to gradual operating and financial expansion over the long term.
The spike in American States Water's dividend payout ratio in 2003 can be explained by a one-time accounting factor. Specifically, the company took a $3.66 million non-cash charge that year related to refunding previously received water rights lease revenue. This decreased reported profitability and made the payout ratio seem inflated. However, operating cash flows actually increased from $25.8 million in 2002 to $46.76 million in 2003. So while earnings were temporarily depressed, cash flow generation improved. When accounting for this non-recurring charge, the payout ratio in 2003 appears more reasonable and aligned with the company's generally prudent approach to dividend growth. The underlying business fundamentals remained strong, even if reported earnings were impacted by the refund adjustment. Overall, the high 2003 payout seems anomalous rather than indicative of an underlying shift in American States Water's commitment to shareholders.
Strong balance sheet and strategic deals to drive earnings
American States Water's has a quite strong balance sheet. In the past two decades, the debt/capital ratio has always stayed in the conservative range of 31.8% to 51.8%. The interest expense coverage ratio has always been above 2x, in the comfortable range of 2.35x to 6.35x.
American States Water's third-quarter earnings grew by $0.16 per share compared to the same period last year. This increase was driven primarily by new water rates approved by the California Public Utilities Commission for the company's Golden State Water subsidiary. On the growth front, American States Water's contracted services business segment was awarded two new long-term contracts to operate water and wastewater systems at U.S. military bases. A 50-year, $349 million contract was secured for Naval Air Station Patuxent River, and a 15-year, $45 million contract was obtained for Joint Base Cape Cod. These contract wins demonstrate American States Water's strong expertise in managing military water systems and position the company for further growth in this niche market. With steady utility operations, crucial rate case approvals, and expanded military privatization contracts, American States Water continues to make strides to deliver shareholder value through reliable services.
The company is worth more than $101 per share
Using the Gordon Growth Model, American States Water's intrinsic value can be derived based on assumptions for long-term dividend growth. Specifically, assuming the company can grow its dividend at lower rate of 6.4% annually over the long term and applying a discount rate of 8%, the model provides an intrinsic value estimate as follows:
P = Expected dividend for 2023 / (Required rate of return - Dividend growth rate)
= 1.53 * (1+0.064)/(0.08 – 0.064)
= $101.75 per share.
Based on the current trading price of $78.40 per share and an estimated value of $101.75 per share, American States Water appears to be undervalued by nearly 30%.
Key takeaway
Indeed, American States Water stands as a paragon of dividend consistency and resilience within the marketplace. With a sterling record of 69 consecutive years of dividend increases, the company not only exemplifies commitment to shareholder returns but also displays a sturdy operational and financial foundation. The utility sector may not dazzle with rapid growth rates or headline-grabbing innovation, but it is precisely this steadiness and predictability that underpin investor confidence. American States Water's ability to steadily increase revenue, maintain a strong balance sheet and a conservative payout ratio, and secure lucrative contracts speaks to its solid business model and strategic foresight. The intrinsic value estimation, which indicates the stock is approximately 30% undervalued, presents a compelling opportunity for investors looking for a mix of reliable dividends and potential capital appreciation.
