In 2018, California Water Service Group (CWT) raised its dividend for the 51st year in a row. Therefore, it is one of the extremely few companies that have become Dividend Kings, i.e., companies that have grown their dividends for at least 50 years.
Surprisingly, this stock flies under the radar of most investors. In addition, it has lost 15% in the last two months. Therefore, the big question is whether the stock has become a bargain, or if there is more downside ahead.
CWT is the third-largest publicly-owned water utility in the U.S. and has six subsidiaries, which provide water in California, Washington, New Mexico and Hawaii. The company provides its services to approximately two million people in 100 communities. 2017 was a surprising year of growth for CWT, particularly since utilities are not typically known for high revenue and earnings growth.
Source: Earnings Presentation, page 6
CWT exhibited great performance last year, as it Earnings Presentation its revenues by 9% and its earnings per share by 39%. The greatest portion of the growth resulted from the rate hikes that were approved by the regulatory authorities. This is healthy, as all the utilities rely on rate hikes in order to grow their earnings and service the debt from their excessive investments.
Utilities are slow-growth companies. Due to the enormous amounts they spend on infrastructure, they all carry excessive amounts of debt and thus bear huge interest expenses every year. Therefore, they completely rely on the regulatory authorities to approve of rate hikes year after year. These rate hikes secure the servicing of the debt but they tend to result only in single-digit growth of the revenues and the earnings per share in the long run.
Source: Earnings Presentation, page 20
On the one hand, regulatory authorities always try to secure rate hikes in order to encourage utilities to spend huge amounts on capital expenses, which are required for the maintenance and the expansion of the utility network. On the other hand, authorities also do their best to satisfy the end consumers and thus tend to limit the magnitude of the rate hikes.