Are Aqua's Earnings Overrated?

Aqua America (NYSE: WTR  ) reported earnings yesterday, squeaking past Wall Street's estimates and improving on key financials. But is this quarter's treat tricking long-term investors? Let's take a closer look at Aqua's ebb and flow.

Number crunching
Aqua America's top line continues to grow, in no small part because of its May 2012 acquisition of Ohio American, which came along with its 57,000 customers. Aqua boosted sales to $215 million, 12% more than last year's third quarter. From January to September 2012, revenue increased 9.6% to $570 million.

Better margins bumped net income up 23% to $50.7 million. For shareholders, that translates to diluted EPS of $0.36, compared with $0.30 for Q3 2011.

Aqua beat Wall Street's $0.35 expectations by a penny and revenue expectations by just over $1 million. 

"These results reflect management's focus on investing the capital needed for infrastructure improvements and receiving timely rate relief, while simultaneously working to control operating costs," noted Chairman and CEO Nicholas DeBenedicitis. 

To put DeBenedictis' benediction into perspective, let's take a look at how Aqua has fared financially over the past five years:

Source: Author. Data from etrade.com 

Both sales and income have risen steadily since 2007. More importantly, the company's profit margin has continued to expand, from 15.8% in 2007 to 20% today. 

Dividend or growth?
With all this profiteering, investors might be wondering how exactly Aqua expects to reward shareholders. For a visual interpretation, let's compare the company's stock growth and dividend with those of its competitors:

WTR Chart

WTR data by YCharts

'WTR Dividend Yield Chart

WTR Dividend Yield data by YCharts

Since 2009, Aqua America's shares have increased 23%. That's about half the S&P 500's   (INDEX: ^GSPC  ) 58% return and a third of American Water Works' (NYSE: AWK  ) stock increase.

But California Water Service (NYSE: CWT  ) and Veolia Environnement (NYSE: VE  ) fell into the red, dropping 22% and a whopping 69%, respectively.

International giant Veolia leads the dividend division, but falling sales and $490 million net income loss for 2011 haven't exactly instilled faith in investors. The other companies fall in a 1% range, with Aqua's 2.6% bringing up the bottom. As its closest companion in stock growth, American Water States (NYSE: AWR  ) beats Aqua by 10% in shares gain and a solid 0.6% on its dividend.

Slip-sliding away?
Aqua's Board of Directors just declared a 6.1% increase in its dividend, the 22nd increase in 21 years and yet another chip off the old 65-years-of-consecutive-quarterly dividends block. The company has also completed 12 acquisitions in 2012, deepening and expanding its presence in 23 states. 

But for all its wheelin' and dividend-dealin', it's a bit of a pricey play.

Company

Price-to-Cash Flow Ratio

Price-to-Book Ratio

Debt-to-Equity Ratio

Aqua America

12.3

2.8

1.3

American Water Works

7.7

1.5

1.3

California Water Service

7.7

1.7

1.3

Veolia Environnement

2.2

0.6

2.8

Source: etrade.com

Compared with its peers, Aqua doesn't have the cash flow or the book value to justify its current price. The company is a solid one, and I don't expect any stock-price surprises or dividend disappearances in the near future, but those reasons are not enough to make Aqua a buy.

For investors who tapped Aqua's spring a while back, they've enjoyed a steady dividend and decent growth. But for investors today looking to maximize their dollar's impact, there's better bang for your buck elsewhere.

If you're interested in some of these dividends on your quest for high-yielding stocks, The Motley Fool has compiled a special free report outlining our nine top dependable dividend-paying stocks. It's called "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can access your copy today at no cost! Just click here to discover the winners we've picked.

Justin Loiseau has no positions in the stocks mentioned above, but he does drink water. You can follow him on Twitter, @TMFJLo, and on Motley Fool CAPS, @TMFJLo.

The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend California Water Service Group, Veolia Environnement, and Aqua America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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