In a world of scarce resources, there's perhaps no resource more vital to human life than water. And, since water is a basic need, companies that engage in water distribution are about as safe a business model as you'll find.
As a result, investors interested in steady, reliable stocks with rock-solid business models should consider the publicly traded water utilities. Water demand isn't likely to stop anytime soon. And, due to a combination of gradual population growth and steady rate increases, there's plenty of room for these stocks to continue rewarding investors for many years to come.
Scarce resource, plentiful profits
The four water utilities investors should get to know are American Water Works (NYSE:AWK), American States Water (NYSE:AWR), Aqua America (NYSE:WTR), and California Water Service Group (NYSE:CWT). As you can probably infer, these companies are extremely similar. They each engage in the production, treatment, testing, and distribution of water, in various parts of the country.
Founded in 1886, American Water Works is the largest publicly traded U.S. water and wastewater utility company. It operates in more than 30 states and parts of Canada, and has displayed strong performance since its 2008 initial public offering. According to the company, American Water's earnings have increased by 14% annualized from 2010 to 2012, indicative of its reliable business model.
American States Water and California Water Service both operate within California, and both hold a nearly $1 billion market capitalization. Furthermore, both companies generate the slow-and-steady type of results that utility investors expect. American States Water reported its second-quarter diluted earnings per share rose 7.5% versus the same quarter one year ago, on the back of 5.3% revenue growth.
Meanwhile, California Water Service reported second-quarter profits that are very indicative of a utility. The company generated $13.5 million in quarterly profit, up fractionally year over year. Revenue also rose at a slow-and-steady pace, from $143.6 million in the second quarter 2012 to $154.6 million in its recently concluded second quarter.
Aqua America, like its peers, is highly profitable, and is actually growing faster than the industry. Aqua America's second-quarter diluted earnings per share jumped 27%, thanks to the company's focus on efficiency. Aqua America has taken measurable steps in recent months to grow through acquisition and simultaneously shed under-performing assets. This laser-like focus has obviously paid off, and investors may want to give Aqua America preference among the group because of it.
Dividends keep flowing
Since their businesses are virtually assured, each of these companies is able to provide their shareholders with a flowing stream of dividends. American States Water Company is no stranger to providing its investors with healthy dividend raises. The company represents the gold standard among dividend payers. American States Water recently increased its distribution by a very healthy 14%. The company has provided investors with dividend payments every year since 1931, and has increased its payout each year since 1954.
Earlier this year, American Water Works increased its dividend by 12%. Although the company is new to the universe of dividend-paying stocks, having gone public in 2008, it has increased its payout five times since its IPO. Meanwhile, Aqua America recently declared its 23rd dividend increase in the last 22 years. The company upped its payout by 9%, and yields 3.1% at recent prices. And, for its part, California Water Service Group has paid consecutive dividends for 274 quarters in a row, a streak amounting to nearly 69 years.
Enjoy a tall glass of profits and dividends
Water is a finite resource and one that we need to survive. As a result, water utilities provide an excellent alternative within the utility sector. Like electric utilities, water is something that consumers will utilize in a good economy or bad. And, also like electric utilities, water utilities are able to pass on gradual rate increases to their customers. If you're weary of the same old electric utilities, water utilities could be a great way to diversify your holdings, while still enjoying the reliable results that utility investors count on.
Each of these stocks has demonstrated a commitment to paying and raising their dividends over time, meaning income investors will see a lot to like from this group. If you're interested in water utilities, let American States Water, American Water Works, Aqua America, and California Water Service Group be the foundation of your research.
Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Aqua America and California Water Service Group. 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.