Water Utilities Don't Face Electric Utility Risks

Human beings lived quite successfully without electricity for thousands of years. Humans, however, can only last a few days without drinking water. That's just one of the reasons why water utilities like Aqua America , American Water Works , and California Water Service Group are worth a closer look.

The utilities technology forgot
Water is a necessity for basic survival. You can have all the electricity in the world, but you'd clearly still die if you had no water. This underlying demand makes water utilities very stable businesses. Population trends lead to an almost predictable demand dynamic. And no amount of technology will ever change that.

For example, Edison International is a major electric utility in California. The company has begun to prepare for an increase in "net metering." That's when customers with solar power installations on their roofs sell power back into the electric grid, essentially becoming competitors sporting little, roof-top power plants.

If Edison International's customers can sell power back into the grid, that means the electric utility will sell less electricity overall. That's why the company has been focusing on its distribution assets over its power generation assets. Edison is watching as technology fundamentally alters its business. That's not happening to California Water Service.

California Water Service's largest business is in its namesake state, where it serves more than 470,000 customers in more than 80 communities. That business represents nearly 95% of revenue. While California Water is constantly making system upgrades like most utilities, it doesn't have to prepare for its customers installing water wells and selling drinking water back into the system.

As Edison International prepares for a very different world, California Water should see a slow and steady increase in demand as California picks up new residents. And it should benefit from rate increases as it upgrades its water systems, too.

California Water's top line has grown every year for the past decade and its dividend has increased steadily, though not annually, as well. Edison's yield is around 2.8% and California Water's yield is about 2.9%. Of the pair, California Water has the more stable business in my long-term opinion.

More diversification
Aqua America is much larger than California Water, serving around 3 million people across 10 states. The company is focused on growth via acquisition, buying 200 water utilities over the past decade. With the financial distress that many municipalities are facing, this acquisition pace could actually increase since selling community-owned utilities would be an easy way to raise cash for expenses such as pensions and retiree health care costs.

Dividends have increased annually for a decade at this around 2.4% yielder. Although revenue declined slightly in 2011, it picked back up again in 2012 and appears to be on pace for another annual increase this year. Of note, Aqua America increased its dividend 9% in September, handily outdistancing the historical inflation rate of around 3%.

WTR Chart

Aqua America data by YCharts

American Water Works, meanwhile, is even larger, providing water services to 14 million people in more than a dozen states. The company was bought by European utility RWE in 2001 and spun off again in 2008. Since that time, the company has been working to reposition its portfolio. That process is very close to done, if not already complete.

Despite its relatively recent IPO, the company has a long history in the United States. The shares yield around 2.6% and American Water Works has fairly well defined growth prospects based on investments in its own infrastructure, with the potential for acquisitions adding to the allure.

Not for yield
California Water, Aqua America, and American Water all yield less than 3%. That compares favorably to Edison International but is well below such venerable utility names as Southern Company, which yields nearly 5%. Water utilities aren't for those seeking high yields. However, they have an underlying demand dynamic that isn't under attack from technology and stable, if not impressive, growth profiles. Investors seeking reliable dividend payers should take a deeper dive here. 

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The article Water Utilities Don't Face Electric Utility Risks originally appeared on Fool.com.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Aqua America, California Water Service Group, and Southern Company. 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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