American States Water Company (NYSE: AWR) has garnered attention for its strong dividend growth, outperforming competitors in the market. Recent years have seen the company benefit from new rate increases, bolstering its topline performance.
Despite a favorable long-term outlook, the stock’s valuation currently stands at a significant premium, making it less attractive for investors at its current price level. This analysis delves into the company’s business operations, recent performance, outlook, dividend growth, valuation, and provides insights into its investment potential.
Business Overview
American States Water Company is a utility firm providing water and electricity services to residential, industrial, and commercial customers across the United States.
Operating under three main segments – Water, Electric, and Contracted Services – the company’s operations involve sourcing, treating, and distributing water, as well as providing electric services and contracted services related to water and wastewater systems.
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Recent Performance
AWR witnessed strong double-digit topline growth throughout 2023, albeit turning flat towards the end of the year.
The company reported a marginal decline in consolidated revenue in the last quarter of 2023, primarily attributed to a significant decrease in the Contracted Services segment, offsetting growth in the Water and Electric segments.
Despite this, the company’s consolidated operating margin experienced a notable increase, primarily driven by margin expansion in the Water segment and lower operating expenses.
Growth Prospects Look Bright
The company’s topline growth hinges on regulatory approvals for rate increases, with recent decisions driving revenue growth. Future rate case filings, particularly with the California Public Utility Commission (CPUC), are expected to further bolster operating revenue.
Additionally, AWR’s Contracted Services segment, buoyed by new government contracts and construction projects, is poised for growth in the long term.
The company’s strong customer base and focus on operational efficiency further support its outlook for sustained growth.
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Dividend Growth
AWR has established itself as a dividend king, delivering positive rate increases for the last 68 consecutive years.
With a dividend yield of 2.39%, the company’s quarterly dividend rate has grown at a compound annual growth rate of 9.4% over the last five years, outpacing peers in the industry.
The Water segment’s robust performance indicates promising long-term dividend growth potential.
Stock Overvalued
Using the Price-to-Earnings (P/E) ratio as a valuation metric, AWR’s stock currently trades at a forward P/E ratio of 23.74 based on 2024 EPS estimates.
While the stock has corrected by more than 20% in the past year, it still commands a premium of over 50% compared to its sector median. Even when considering forward P/E based on FY25 EPS estimates, the stock appears overvalued relative to its sector peers.
Premium Valuation Raises Concerns
Despite its strong performance and dividend growth track record, AWR’s current valuation presents challenges for investors.
While the company’s long-term outlook remains positive, the premium valuation limits its attractiveness as an investment option at present.
A cautious “HOLD” rating is warranted until the stock’s valuation aligns more closely with sector peers. Investors should monitor future developments closely to capitalize on potential buying opportunities.
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I’m Marcus Reynolds, a versatile writer known for connecting the dots between various news topics. My writing offers clear and thought-provoking insights into current events worldwide. I strive to keep you informed and engaged, making the ever-evolving world of news easier to navigate and understand.
