Investment Article
Water Utilities Stocks
Enclosed are three Morningstar reports on Water Utility stocks. I believe that there are investment opportunities in this country and this sector. Please allow me to explain why.
Water utilities are heavily regulated companies that are primarily responsible for the distribution of water, wastewater treatment, and other similar services. In order to generate additional revenue, water utilities submit rate increases over time to state regulators for approval in order to cover the cost of expanding or improving infrastructure[i]. This allows for these companies to maintain steady revenues while modernizing any of their aging infrastructure. With typically over 80% of their revenue derived from residential customers, most of a water utility’s revenue does not experience swings depending upon the health of the economy[ii]. Because water utility bills are relatively low for residential customers, consumption patterns do not typically change for these customers, whereas economic swings do affect the total use for industrial and commercial consumers – the source of the remaining 10-15% of a water utility’s revenue.
Furthermore, increased consolidation, through mergers and privatizations of municipal water systems, has historically shown to be a proven way for companies to increase their cash flows. With the combination of 80 percent of the country being served by municipalities and many municipalities receiving lower tax revenues over the past few years, selling water systems to public companies has become a way for municipalities to improve their budgets because they receive an amount up front for the water system. Therefore, this benefits both the municipalities and water utilities, which can generate higher cash flow over time.
Of the three highlighted stocks, they all currently payout dividend yields in the range of 3-4%[iii]. Over the past decade, they have also all increased their dividends by 2-5% annually. Moreover, each has a beta between .1 and .5, meaning that their stocks have historically been half as volatile as the S&P 500 Index. Finally, the growth and demand for public water utilities has led to their strong stock performances over the past decade as the three stocks have an average return of 34.79% compared to the S&P 500 which increased 7.78%[iv].
At Armstrong Advisory Group, we manage wealth for affluent and educated families. You will find three Morningstar research reports enclosed with this material, and please understand that we are not recommending all of these stocks today. We would like to extend to you the opportunity to have your current investment portfolio reviewed. During this review process we will help you determine if any of these three Water Utility stocks would be appropriate. Our minimum household account size is $250,000. Please call (800) 393-4001 if you would like to have your current investment portfolio reviewed.
[i] Costanza, Andre. Industry Analysis: Water Utility. Value Line. <http://www.valueline.com/Stocks/Industry_Report.aspx?id=7172.>
[ii] Winter, Timothy. Outlook for Water Utilities. 20 April 2009. Seeking Alpha. 2 Nov. 2011. <http://seekingalpha.com/article/131741-outlook-for-water-utilities.>
[iv] Google.finance.com. 5 Jan 2012.
Dividend yield investing may not be suitable for all investors. You should never invest solely on the basis of dividends. Higher dividends will result in lower retained earnings. Investments paying dividends do not carry lower risk. Dividend payments are not guaranteed by the issuing entity. The issuer can discontinue the dividend at any time. Dividend payments reduce the price of the security by the amount of the paid dividend.
Securities offered through Securities America Inc., Member FINRA/SIPC and advisory services offered through Securities America Advisors, Inc. Armstrong Advisory Group and the Securities America companies are unaffiliated. Representatives of Securities America, Inc. do not provide legal or tax advice. Please consult with a local attorney or tax advisor who is familiar with the particular laws of your state. 10/11
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