Tim Winter, CFA
Gabelli & Company
American States Water (AWR) of San Dimas, Calif., is the parent company for Golden States Water Company and American States Utility Services. AWR is a high-quality utility with a strong balance sheet (58% common equity) and high credit ratings (S&P: A+). In 2014, AWR expects to invest $80 million-$90 million on capital expenditures and has authorized a stock repurchase plan of up to 1.25 million shares through June of 2016.
Shares offer a 2.8% current return on the $0.85 per share annual dividend, which represents a 57% payout ratio of our 2014 earnings estimate [and] allows for ample cushion for further dividend growth. We recommend investors hold AWR shares given our belief that the water utilities strong fundamentals are fairly recognized in share price. AWR shares trade at 20.6 times and 18.7 times our 2014 and 2015 earnings estimates compared to peer group multiples of 19.5 times and 17.6 times, respectively.
Our 2014, 2015 and 2016 earnings estimates for Aqua America (WTR) remain $1.20, $1.30, and $1.40 per share, respectively. Earnings growth will continue to be driven by rate increases, acquisitions and cost controls, as well as ongoing repair tax deduction. Management expects customer growth of 1.5-2.0% annually, rate increases in non-Pennsylvania states, infrastructure surcharges and improved results from the Marcellus water wholesale business in 2014 and beyond.
Six (Penn., Ill., Ind., Ohio, N.J., and N.C.) of the eight-state jurisdiction where WTR operates allow infrastructure surcharges, which results in timely returns on investment. Year-to-date 2014, WTR has made seven acquisitions, including the privately held Presidential Service Company (1,500 people), the municipal wastewater system of Penn Township, Penn., (2,300 people and 25 commercial customers) and Summit Lake, N.J.
Ryan M. Connors
Janney Capital Markets