Water utilities’ business models have allowed companies to maintain high growth under a very uncertain economic outlook. Also, relatively high regular distributions of dividends have made them particularly appealing to investors.
Opportunity in Brazil
Companhia de Saneamento Basico (ADR) (NYSE:SBS) – provides water and sewerage services, along with waste management, in the City of São Paulo.
Brazil is one of the largest developing economies in the world. Even if its growth has slowed recently, high growth over the years has resulted in a wealthier population, as evidenced by a growth in per capita GDP. As wealth increases, demand on utilities grows, including water and cleaner water. The IMF expects Brazil’s growth to recover over this year and the next.
In FY 2012, the company’s earnings increased 56% y-o-y, while revenue grew 8%. The company has been growing revenue at nearly 8% per year recently, in real terms. Sabesp dividends are not paid regularly, but generally about three times a year, and have recently split twice. In the beginning of April the company paid a $0.3454 dividend.
Two important companies from the U.S.
American Water Works Co., Inc. (NYSE:AWK). Headquartered in Voorhees, New Jersey, it is the largest investor-owned water and wastewater utility in the U.S.
Because of it size, the company has considerable advantages over its competitors in pursuing the investment opportunities presented by the poor state of water infrastructure in the U.S. It is difficult for local authorities to fund the investment needed in water infrastructure. American Water Works Co., Inc. (NYSE:AWK)’s size and geographical diversity positions it to better capitalize on these opportunities, as it is easier to connect new customers to existing systems and treatment plants than to build new infrastructure.
Its size also helps to maintain lower rates, as it can balance less profitable operations in one state with more profitable operations in others. The company’s revenue is dictated by state and local regulators.
American Water Works Co., Inc. (NYSE:AWK) diluted earnings per share increased 14.3% year-over-year in the first quarter, boosted by rate adjustments and lower income tax expenses. American Water Works Co., Inc. (NYSE:AWK)’s progress in improving operations and financial performance continues as the company improves rates and cuts costs.
American Water Works Co., Inc. (NYSE:AWK) will pay a cash dividend on June 3 of $0.28 (record date May 24). This represents a 12% y-o-y increase.
American States Water Co (NYSE:AWR) is a California-based public utility company engaged in the purchase, production, distribution, and sale of water. It also distributes electricity in some communities.
The company beat analysts’ estimates by posting a 30.2% year-over-year increase in diluted earnings per share in the first quarter, due to a strong performance in the water segment, which grew 82.1%. Revenue was up 3.4% y-o-y, which benefited from the favorable water rate case at its subsidiary, Golden State Water Co. The new approval will result in an additional $10 million of revenue in 2013.
American States Water Co (NYSE:AWR) approved recently a 14.1% increase in its third-quarter cash dividend, from $0.355 to $0.405 per common share. This is equivalent to a $0.20 increase in its annualized dividend rate to $1.62. American States Water Co (NYSE:AWR) has paid dividends to shareholders every year since 1931, increasing the dividends received by shareholders each calendar year since 1954.
“This double-digit increase in our quarterly dividend and the stock split reflect our Board’s confidence in the company’s ability to continue to deliver solid results and its desire to have a payout ratio that is more in line with our peers”, said Robert J. Sprowls, President and CEO of American States Water Co (NYSE:AWR).
Bottom line
For investors willing to take the risk of investing outside the U.S., Sabesp should reward long-term investors who can withstand the added volatility that comes from investing in emerging markets.
As for U.S.-based companies, American States Water Co (NYSE:AWR) is the best positioned to outperform the market. In terms of company value, it’s the cheapest. Also, it has once again surpassed quarterly estimates, making it five quarters in a row, managing to boost its results by cost control and a favorable rate decision. In terms of dividend yield, both companies from the U.S. have the same dividend yield of 2.6%.
Victor Selva has no position in any stocks mentioned. The Motley Fool recommends Companhia de Saneamento Basico (ADR).
The article What Makes The Water Utility Industry Profitable originally appeared on Fool.com and is written by Victor Selva.
Victor is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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