Water Company to Dip Toe Into Splitting Stock

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After a long drought, the stock split has come back to L.A.’s public company scene. And the first company to come out of the spigot is a water utility.

Last week, American States Water Co., the San Dimas parent of the Golden State Water utility, announced it would implement a two-for-one stock split this summer, along with a hefty dividend increase.

It’s believed to be the first stock split for a Los Angeles County company since the 2008 market collapse. And it comes after a long market rally that has seen the major indices rising significantly in recent weeks.

“This is the first of several stock splits we’re likely to see at local publicly traded caompanies in coming months,” said Ryan Bernath, head of investment banking at B. Riley & Co. in West Los Angeles. “It’s a byproduct of the lengthy run-up in share prices that we’ve seen.”

Public companies use stock splits to keep their share prices low to attract individual investors. Also, by adding shares, splits increase a company’s liquidity, which especially benefits companies with thinly traded stocks.

That the first local company out of the gate is a water utility should not come as a surprise. Utility companies in general have traditionally catered to individual investors; they are commonly referred to as “widows’ and orphans’ stocks.” Key features of these stocks are their relatively cheap price and substantial dividend payouts.

Water utilities have been among the biggest market gainers over the last year and American States has been no exception: Its shares have jumped 46 percent, closing at $53.40 on May 22. While that’s great for existing shareholders, it’s not so great for individual investors looking to get per-share dividends.

“These stocks have high percentage of retail ownership and they like to keep the share price affordable,” said Heike Doerr, senior research associate for utilities with the Philadelphia office of Robert W. Baird & Co.

Earlier this month, one of American States’ eight publicly traded water utility competitors, Aqua America Inc. of Bryn Mawr, Pa., announced a 5-4 stock split.

“With that stock-split announcement, that left our stock as the highest-(priced) publicly traded water utility,” Robert Sprowls, chief executive of American States, told the Business Journal last week. “Generally, when a water utility stock gets out of range of its peers, that’s when you see stock splits, and that’s why we acted.”

Sprowls said the split should bring in more individual investors. Also, he said, the greater liquidity helps when an institutional investor wants to lighten its position: Its decision to sell won’t drive down the share price.

“We’re a thinly traded company with only about 130,000 shares,” he said. “By splitting the stock, we double the volume.”

Sprowls said that this is the first stock split American States has implemented in a little more than a decade.

Along with the split, American States announced a 14 percent increase in its quarterly dividend. It marks the 59th consecutive annual dividend increase for the company and would give stockholders a presumed payout of about 3 percent.

“This gives us a payout ratio more in line with our peers,” Sprowls said.

The jump in American States’ share price last year and early this year was largely due to better than anticipated performance at its unregulated contract service business, primarily providing water and related infrastructure services to U.S. military bases. The performance was buoyed by a surge in water and wastewater construction contracts at several of the bases last year.

Sprowls said that so far the company hasn’t suffered much from the federal government’s budget sequestration.

“Most of our contracts are in the must-pay category that is specifically exempted from sequestration,” he said.

The share price has also benefited from resolution of Golden State Water’s rate case before the California Public Utilities Commission. Earlier this year, Golden State received most of the rate increases it sought for its service areas throughout the state. Sprowls said this will allow the utility to make necessary repairs and upgrades to its water distribution network.

More splits coming?

B. Riley’s Bernath said he expects more stock-split announcements from local companies in the near future.

“Generally, once a stock gets into the triple digits, that’s when retail investors tend to shy away because it’s too expensive – unless you’re dealing with a tech titan like Apple or Google,” Bernath said. “With the recent run-up in share prices, you’ve got quite a few local companies now that have crossed that $100 threshold.”

He’s got his eye on one area company in particular: Amgen Inc., which closed at $104.53 on May 22, up 21 percent year to-date. The Thousand Oaks biotech giant last implemented a stock split in November 1999, when the stock was near $95 a share.

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Howard Fine
Howard Fine is a 23-year veteran of the Los Angeles Business Journal. He covers stories pertaining to healthcare, biomedicine, energy, engineering, construction, and infrastructure. He has won several awards, including Best Body of Work for a single reporter from the Alliance of Area Business Publishers and Distinguished Journalist of the Year from the Society of Professional Journalists.

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