The following stock valuation is about a stock in a sector I have an eye on for quite a while. But unfortunately this sector seems to be really overvalued. It is about the water sector and the company is American States Water. But let’s have a look at it where I can find a fairly valued price for me.
American States Water- (AWR)-engages in water and electric service utility operations for residential and commercial customers in the United States. As of December 31, 2007, it served 254,546 water customers and 23,273 electric customers in California, as well as operated 2,724 miles of pipeline of water transmission and distribution systems. The company was founded in 1929 and is headquartered in San Dimas, California. AWR has increased its dividend for 62 years.
Currently AWR is priced at 44.07 USD per share.
If I take the weighted average of the 4 ratios according to the 5 year average the price would be at 32.4 USD. That means the current price is 35.9% above its 5 year average. The 5 year high was at 46.56 USD about one year ago, so currently the stock just trades 5.3% below its 5-year high.
The fair market value ratio for the Utilities Regulated Water Secto, according to morningstar is currently at 1.12. If I divide the current price by it I will get a price of 39.35 USD.
Earnings per share growth
In 2011 the EPS were 1.21 USD and expected EPS in 2016 will be around 1.63 USD. This means EPS grew on average by 6.14%. For the utility sector this kind of growth is ok, as Utilities are not really fast growing companies.
Dividend History and Future
AWR has an impressive dividend history with increasing the dividend for 62 years in a row. In the last 5 years, the average growth per year is 10.35% based on a dividend of 0.55 USD in 2011 and a current full year one of 0.90 USD. The payout ratio with 55.2% will be still on reasonable level.
An important point for my buying decision is as well the dividend yield on cost, which is currently at 2.20% based on the new quarterly dividend of 0.97 USD. After tax my minimum yield, I want to reach within the next 3 years, should be at 2.8%. This means it should have a yield of 3.9% before tax.
Assuming a dividend growth of 7.5% per year the dividend in 2020 will be at 1.20 USD, which means a yield on costs of 2.73% before tax. From this point of it is currently not a buy as the yield will be to low for me.
In general the water sector is definitely worth to look at but currently I don’t see a good possibility for buying any stock, as this sector seems to be heavily overvalued and AWR is just an example for it. But let’s get back to AWR, which has an impressive dividend history and operates in a stable business environment. With a D/E ratio of 0.65 the company can be considered as financial healthy, nevertheless you also should consider the negative free cash flow per share in the years 2008 until 2011.
As a good entry point I see a price per share of around 35.00 USD, which would be 20.5% below its current price.
An alternative for a water investment would be some ETF’s like iShares Global Water UCITS ETF.
What do you think about AWR? Do you have any Water stocks in your portfolio or would consider buying some at the current prices?
Disclosure: I do not recommend any decision to the reader or any user, please consult your own research. Thank you for your understanding.