Aqua America Trickles Ahead

On Monday, the largest publicly traded water utility in the United States, Aqua America (NYSE: WTR), met the Street's earnings expectations for the third straight quarter. Operating revenues grew 14% over Q2 2006 to $150.6 million, and net income also met analyst estimates by coming in at $23.7 million, up 6% year over year. Management attributes an increase in revenue to a rise in utility rates from new acquisitions. This trend is likely to continue as Aqua America has applied for rate increases in several states. However, meeting expectations didn't do much to boost the stock's price as it remained flat after the earnings announcement.

Tuesday's announcement of a 9% dividend increase, however, seemed to draw higher acclaim from investors, as the stock traded 2% higher for the day. The dividend increase is the 17th hike for the company in the past 16 years, and also boosts the current annualized yield to 2.1%.

Drowning out the competition
Aqua America has had an insatiable appetite for gobbling up water and wastewater systems in recent years. In 2006 alone, the company added 28 such systems to its bullpen and expects to add at least 20 more in 2007. Indeed, the aggressive acquisition strategy has been the backbone of the company's growth story for some time now.

With demand for clean water and sanitation services growing all over the world, both U.S.-based water utilities like Aqua America, California Water (NYSE: CWT), and American States Water (NYSE: AWR) and international concerns like Suez (NYSE: SZE), United Utilities, and Veolia Environnement SA (NYSE: VE) stand to profit. So it certainly makes sense for Aqua America to expand its reach and increase its pool of customers as demand grows.

That said, long-term Aqua America investors should pay close attention to the effectiveness of the company's acquisition strategy over the next few years. Improving results will need to be displayed if the stock price is to justify its lofty valuation, with its PEG ratio currently above 3.

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Fool contributor Todd Wenning's favorite tap water is found in Northern New Jersey, believe it or not. He does not own shares of any company mentioned. The Fool has a disclosure policy.