The Blue Gold Rush

By Ryan Guenette - August 21, 2012 | Tickers: AWR, AWK, WTR, CWT, SJW | 0 Comments

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Water is the single most essential thing for the human body. A person can survive only three to five days without water, yet some have been reported to survive 7 days. 75% of the human body is made up of water, so it is of no surprise that providing water is considered a necessity. Water is more important to humans than electricity, cable, and waste collection combined. Companies that provide water to consumers are among the safest investments that can be made, as humans will always need a supply of water. One company that is a major player in this industry is American Water Works Company Incorporated (NYSE: AWK). American Water provides drinking water, wastewater, and other water services to approximately 15 million people across 30 states and two Canadian providences. Over the past year American has rallied 34.78%, over a period in which the S&P 500 has only rallied 18.98%. So is this water provider cashing in on the blue gold rush?

Rock-Solid Fundamentals

In 2010, American Water reported earnings per share of $1.53. In 2014, the average analyst consensus believes the company will derive $2.32 per share from its business operations. This represents an increase of 51.63% in earnings per share over 4 short years. Based on these statistics, the company’s compound annual growth rate (CAGR) is 10.97%, an astonishing feat for a company with such steadiness and sustainability. Growing at an annualized 10% clip, American will be able to create free cash flow to reinvest into its own business, acquire other businesses, and pay out and grow its dividends. Currently, the company pays out an annual dividend of $1.00, which at the current price, puts American Water’s dividend as yielding 2.63%. This dividend is up from 2011’s annual dividend of $0.92, and is expected to further expand into the future. By 2014, the street anticipates American’s dividend to reach $1.10. 10.00% dividend growth over two years is modest, but highly rewarding. From this we can see American Water’s underlying financial strength, as well as its consistent and adequate growth profile.

The chart below displays American Water Works Company Incorporated’s sales, operating profit, net income, net margin, operating margin, earnings per share, dividend, and rate of dividend (the percentage of net income that is paid out in the dividend) over the foreseeable future.

Sustainability through Recessions and Depressions & Growth Prospects

Utilities are among an elite group of companies that have the lowest chance of going out of business. Electric utilities are among the most stable companies in the world, yet in the deepest of depressions, people may not find the money for their electricity bill. While an incredible stretch, it is a possibility. Water is a building block of life, and no matter the economic environment, people will have to pay their water bill. This gives an unmatched level of sustainability to companies that provide water to the population. This characteristic does however have a downside. Water companies’ growth is slower than technology or industrial names, as they are steadier. American Water will grow through reinvesting in its own company, becoming more efficient by increasing margins, and acquiring other sections of the nation. Fortunately, for American Water, the United States population growth is substantial, and by 2050 there is expected to be 420 million people in the United States. Simply put, the more people in the United States, the more potential customers there are for American Water. To display further growth, American must reinvest the $4.58 a share of cash flow it had on the books in 2011 into its own business, or use it to acquire new sections of service. All in all, water utility companies are probably the safest investment one can make. Additionally, American Water Works Company will continue to experience annualized 10.00% growth if it is able to execute properly.

The chart below displays the United States of America’s historical and projected population.     

Is Anyone In Murky Water?

Compared to some of American Water’s most prominent competitors, such as: Aqua American Incorporated (NYSE: WTR), California Water Service Group (NYSE: CWT), American States Water Company (NYSE: AWR), and SJW Corporation (NYSE: SJW), American compares relatively favorably.

In terms of growth, American Water is unmatched by anyone else in the industry, yet all companies grow at sustainable rates. All companies pay out dividends yielding 2-3%, and grow their dividends at moderate rates. In the fundamental ratio comparison, American Water and California Water trade at the most appealing ratios, while Aqua American trades at a premium to its peers. When growth is taken into account, Aqua America trades at a huge premium to its peers, while SJW trades with the lowest multiple. In the net profit margin comparison, Aqua America stands out to the upside, while California Water stands out to the upside.

The Foolish Bottom Line

The modern-day gold rush is blue. Water is a necessity to humans, more important than electricity and waste collection. American Water provides the majority of the United States, as well as sections of Canada with this basic necessity. American Water is the largest player in the industry, having a market capitalization of $6.72 billion. American has a strong financial profile, and a growing dividend. It is one of the safest investments one can make, as water services are the last thing to go. If the company can execute on its strategy, it will be able to continue to grow at its 10.00% annualized clip. Additionally, the stock is currently not vastly overpriced, despite having run up drastically over the past year. The foolish bottom line is that American Water Works is a tremendous company to have in any portfolio in this volatile global market, and will undoubtedly offer significant capital preservation and growth over the coming years.        

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