Is Aqua America, Inc. a Buy?

Wet behind the ears when it comes to water utility stocks? This company's a great place to start.

Scott Levine
Scott Levine
Apr 6, 2018 at 6:36AM
Energy, Materials, and Utilities

Whether they prefer an aggressive or conservative approach to investing, all investors should have niches carved out for stocks that represent lesser degrees of risk. In this vein, Aqua America (NYSE:WTR), one of the largest publicly traded water utility stocks, deserves consideration. 

Let's examine whether Aqua America is a buy today.

Three signs stand side by side with the words buy, sell, and hold with arrows written on them.

Image source: Getty Images.

Diving into the dividend

With the growth of political uncertainty in Washington and the increase of talk regarding trade wars, it's unsurprising that many investors, concerned about volatility, turn to utility stocks. Others, however, prefer utility stocks because of the dividends.

Distributing quarterly dividends for 73 consecutive years, Aqua America rewarded shareholders with a 7% year-over-year dividend increase in 2017. Since 2012, the company has grown its dividend at a 7.9% compound annual growth rate. Offering a dividend yield north of 2.4%, Aqua America represents one of the higher yields among all water utility stocks. Furthermore, Aqua America has averaged a conservative 58.6% payout ratio over the past 10 years.

New customers continue to trickle in

Although Aqua America reports organic growth each year, the company primarily relies on the acquisition of municipal water and wastewater systems to grow its customer base of 3 million. Aqua America reported delays in the closings of two acquisitions in 2017. Consequently, the company only reported year-over-year growth of 1.1% in 2017 -- below the 1.5% to 2% which it had predicted.

This hiccup, however, should certainly not suggest to investors that the company is in troubled waters. Addressing its plans for 2018, management noted that it expects the two delayed closings from 2017 to be completed in 2018. Moreover, it foresees closing several other acquisitions during the year. In total, Aqua America expects to report year-over-year overall customer growth between 2% and 3% in 2018 -- a considerably greater figure than than the 1.5% and 1.1% it reported in 2015 and 2016, respectively. Looking beyond the deals which are already slated to close, management notes that its 10 largest municipal potential acquisitions total over 289,000 connections. For some context, the company added 18,240 customers from acquisitions from 2015 to 2017.

These returns hit the high-water mark

Besides demonstrating skill at growing its customer base, management has also proven to be skilled at making acquisitions which are strategic -- in proximity to those areas where it already operates -- and help the company to achieve greater economies of scale.  For example, in comparison to its peers -- American Water Works (NYSE:AWK), California Water Service (NYSE:CWT) and Connecticut Water Service (NASDAQ:CTWS) -- , Aqua America excels at controlling expenses thus generating the highest operating margin.

WTR Operating Margin (Annual) Chart

WTR Operating Margin (Annual) data by YCharts.

The value of management's ability to keep costs in check is further evidenced by the company's ability to generate higher returns on equity and invested capital as compared to its peers. 

WTR Return on Equity (TTM) Chart

WTR Return on Equity (TTM) data by YCharts.

Checking the price tag

Aqua America, by several measures, appears enticing, so let's turn to the stock's valuation. Trading at 24.9 times trailing earnings, Aqua America may seem richly valued compared to its five-year average trailing price-to-earnings ratio of 23.7, according to Morningstar. And it may seem even pricier in terms of cash flow. Whereas its five-year average price-to-cash-from-operations ratio is 13.7, it currently trades at 15.7 times cash flow.

WTR PE Ratio (TTM) Chart

WTR PE Ratio (TTM) data by YCharts.

Again, comparing the stock to its peers provides valuable perspective. In terms of trailing earnings, Aqua America appears to be a bargain, and even though its price tag seems less attractive in terms of cash flow, this should hardly be a factor that mitigates one's enthusiasm for an otherwise compelling opportunity.

Investor takeaway

Besides Aqua America's attractive dividend policy, management's ability to put shareholders' capital and capital that the company invests in itself to good use suggests that investors could benefit from having this stock in their portfolios. And with a reasonably valued price tag, now seems like as good a time as any to take the plunge with Aqua America.