Is American States Water the Right Stock to Retire With?

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Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

Water is the world's most precious resource, and its value is only going to go up as population increases threaten to create shortages. Amid the looming crisis, American States Water (NYS: AWR) could end up playing a big role in providing a solution. Below, we'll look at how American States Water does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at American States Water.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$653 million

Fail

Consistency

Revenue growth > 0% in at least four of five past years

5 years

Pass

 

Free cash flow growth > 0% in at least four of past five years

2 years

Fail

Stock stability

Beta < 0.9

0.34

Pass

 

Worst loss in past five years no greater than 20%

(9.9%)

Pass

Valuation

Normalized P/E < 18

13.96

Pass

Dividends

Current yield > 2%

3.2%

Pass

 

5-year dividend growth > 10%

3.3%

Fail

 

Streak of dividend increases >= 10 years

57 years

Pass

 

Payout ratio < 75%

50.3%

Pass

    
 

Total score

 

7 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With seven points, American States Water cleans up for conservative investors that like solid dividends and stable prices. With well over half a century of annual dividend increases, the water utility is still poised in a strong growth industry with plenty of potential.

American States Water is a small company that primarily focuses its efforts on the water-starved areas of California and Arizona. Yet while industry leaders like American Water Works (NYS: AWK) and Aqua America (NYS: WTR) are much larger, American States Water has carved out a fairly extensive niche market, serving 75 communities within 10 counties in California as well as part of the Phoenix suburb of Scottsdale.

American States Water also stands out from similarly sized companies like California Water Service (NYS: CWT) and San Jose Water (NYS: SJW) in that it also provides electricity service to some of its customers. But it's not reasonable to compare American States to electric giants Duke Energy (NYS: DUK) or Southern Company (NYS: SO) ; its real growth potential is in water, and American States has willingly endured negative cash flow for the past several years in order to help build out the capital-intensive facilities it needs to be a player in the water industry.

For retirees and conservative investors, the prospects of growth are nice, but what's really appealing is the company's 3%-plus dividend yield. Moreover, with the possibility of consolidation within the industry, shareholders could end up getting a nice acquisition premium at some point in the future. The combination of income while you wait and catalysts to boost share prices adds up to an attractive prospect for retirement portfolios.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

Add American States Water to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the13 Steps to Investing Foolishly.

At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of California Water Service. Motley Fool newsletter services have recommended buying shares of Aqua America, Southern Company, and California Water Service. 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 Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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