For investors looking for a constant income stream, publicly traded companies that consistently increase their dividends are especially attractive. And among those companies, one stands out for having the longest consecutive streak of annual dividend increases in the nation: American States Water Co., of San Dimas.
This water services company first increased its dividend payout in 1954 when Dwight Eisenhower was president and for each of the next 64 years, has delivered a bigger dividend payout to investors than the previous year. That streak of 65 years is two years longer than household name stock Procter & Gamble Co. and four years longer than 3M Co., according to online publication Dividend Value Builder. The publication ranked American States Water as the dividend increase champion and one of only eight companies nationwide that has increased its dividend for at least 60 straight years.
“We are proud of this achievement,” said Robert Sprowls, chief executive of American States Water. “Besides being very attractive to investors, we believe our dividend growth has allowed us to access capital at lower cost and has also helped increase our stock price.”
Utility companies, with their regulated rates of return and relatively constant customer base, have long provided dividends to attract investors. Sprowls said the dividend growth streak has positioned the company well compared to other utilities because it sends a signal to the markets that the company has confidence in its ability to sustain cash flow and growth.
Sprowls said the company intends to continue the streak indefinitely, with a long-term goal of five-year annual compound dividend increase of more than 6 percent.
And American States Water still has lots of room to increase its dividend payout. In 2018, the total dividend payout topped $1 per share for the first time ($1.06 total). That’s still considerably below local utility giant Edison International; the Rosemead company paid out annual per share dividends of $2.43 last year.
The stock price itself reached a 52-week high of $69.16 on Dec. 10 and closed Dec. 28 at $66.76 a share.
For the first nine months of 2018, the company reported net income of $50.1 million, or $1.35 per share of diluted earnings, down from $56.5 million, or $1.53 per share of diluted earnings, for the same period in 2017; part of the drop was due to a one-time boost in 2017 resulting from the sale of a water system serving the Ojai area. Operating revenues for the first nine months of 2018 were $325.8 million, down from $336.4 million for the same period in 2017.
Military boost
The company has been ramping up its dividend increases in recent years, thanks in large part to additional revenue coming in from its unregulated business of water and wastewater service contracts for U.S. military bases. An analysis of the dividend data provided by the company showed the annual dividend payout has doubled over the last nine years. Before that, the dividend payout took 26 years to double and before that, it doubled over 19 years.
This dividend increase acceleration has coincided with the increased flow of contracts for privatization of water and wastewater services on U.S. military bases. From a nearly nonexistent business 15 years ago, the company’s American States Utility Services unit now has contracts for the operation, maintenance and construction management of the water distribution, wastewater collection and treatment facilities at 11 major U.S. military bases in eight states, including four of the largest bases by population. The most recent contract for $601 million over 50 years began in July at Fort Riley in Kansas.
“The acceleration in the dividend increases does coincide with that particular business, and that’s by design,” Sprowls said. He noted the company first sought military base contracts in the late 1990s, winning its first contract in 2004. But, he said, it wasn’t until 2009 that the unit became profitable on what the company’s board considered a sustainable basis.
“That was when we could start including those earnings in our dividend payouts,” he said.
In 2018, the company told Wall Street analysts it expected its military contract business to add about 40 cents a share toward a consensus analyst estimate of $1.74 earnings per share, or about 23 percent of earnings. Sprowls said that, in 2019, the company expects the military contract business to contribute between 43 cents and 47 cents a share. “That’s a faster growth rate than our regulated utility business,” he said.
American States Water has emerged as one of two main players in the military water/wastewater privatization business, according to Jonathan Reeder, a utilities equities research manager at the St. Louis office of Wells Fargo Securities. The other major player is American Water Works Co. Inc., of Camden, N.J.; according to its website, its military services group holds contracts at 14 U.S. bases.
“While it took AWR (American States Water) a few years to figure out the military contract business and build scale, ASUS has developed into a consistent earnings contributor,” Reeder said.
Looking ahead, he said, “ASUS provides AWR with another avenue to grow earnings as the military has yet to privatize a considerable number of bases.”
Rate case
As for American States Water’s regulated utility business, its Golden State Water Co. utility serves 260,000 water customers throughout California, including in several Los Angeles County communities. The company also operates a small electric utility serving about 24,000 customers in the Big Bear Lake area.
The major news last year was a settlement between Golden State Water and the ratepayer advocate’s office of the California Public Utilities Commission for the three-year general rate period beginning this month (January 2019). Golden State Water agreed to a rate increase that was nearly 30 percent less than it originally sought.
The settlement must still be ratified by the commission, which is expected to act this spring.
Reeder said investors greeted news of the settlement positively as it removed the risk of protracted litigation over rates.
Golden State Water customer rates were reduced nearly 6 percent last year, which Sprowls said was as a result of a lower corporate income tax rate from the 2017 Tax Cuts and Jobs Act put forward by President Donald Trump and passed by Congress as well as a CPUC decision to lower Golden State Water’s rate of return.
Takeover threat diminished
Another piece of welcome news for investors in American States Water is the apparent withering of movements in some California communities to try to wrest away control of water systems from Golden State Water. For the better part of a decade, Golden State faced two such efforts: one in Ojai and one in Claremont, both centered on complaints about Golden State’s water rates.
After protracted negotiations, Golden State agreed to sell its Ojai water system in 2017 to the nearby Casitas Municipal Water District for $34.5 million.
In late 2016, a court ruling ended an attempt by the city of Claremont to invoke eminent domain to force a sale of Golden State’s water system in that city. That was the first test case of eminent domain since guidelines were put in place 20 years ago regarding attempted public takeovers of private water systems.
Since that court ruling, there have been no further public takeover efforts of Golden State’s water systems. Sprowls said the ruling itself sent a signal that hostile public takeover efforts would face a very high bar. But he also said the two cases served as a wakeup call to the company.
“We realized we had to be even more proactive with our customers,” he said. “We have looked at innovative ways to keep customers as informed as possible on what capital work we’re doing and why, so they understand why it’s necessary to replace pipelines and improve systems.”
