Aqua America

Aqua America Inc. ( WTR - Snapshot Report ) is a premier water utility with relatively low risk earnings growth and an expanding dividend that yields a solid 2.7%. Positioned in a niche industry with high barriers to entry, this Zacks #2 Rank (Buy) enjoys near-monopoly status in its area of operation. On top of this, the utility’s best-in-class cost control and limited credit market exposure presents a unique opportunity to own a safe stock.

Impressive 2Q, More to Come

Aqua America reported second quarter earnings per share of 30 cents on July 30, beating the Zacks Consensus Estimate of 28 cents by 7% and the year-ago earnings of 25 cents by 20%. Revenues of $198.2 million were up 11% year over year from $178.3 million, and also surpassed the Zacks Consensus Estimate of $196.0 million. Results were driven by positive rate relief and cost controls.

Looking ahead, the utility’s April start-up of its Marcellus shale pipeline joint venture with Penn Virginia Resource Partners L.P. (PVR) is likely to be a key catalyst in diversifying its portfolio outside of the core business of regulated water services. The venture aims to supply fresh water to energy companies’ drill sites in the region.

Additionally, with extremely hot weather set to continue across WTR’s major markets of Pennsylvania and New Jersey, the second half of 2012 looks even better.

Consistent, Secure and Regularly Expanding Dividend

Aqua America pays an annual dividend of 70 cents per share, yielding a solid 2.7%. The utility hiked its dividend payout by 6.1% earlier this month, marking the 22nd dividend increase in the past 21 years. Aqua America has a long and consistent dividend paying record, going back some 65 years.

Moreover, Aqua America’s current dividend caps the payout ratio around 65%, reasonable and in line with peers. This indicates enough headroom for future dividend increases given the utility’s strong management and solid financial position.

Earnings Set to Move Up

Based on the continued base rate growth, disciplined business strategy and prudent financial management, seven out of 13 estimates for 2012 have moved higher in the past 7 days. The Zacks Consensus Estimate has moved up by a penny (or 1%) to $1.08.

For 2013, six of 13 estimates moved north over the same time frame, again helping the Zacks Consensus Estimate advance by a penny (or 1%) to $1.18.

Given the 94 cents per share earned in 2011, the projected growth rate stands at 15% for 2012. If Aqua America hits the estimate in 2013, the annual growth rate will be 9%.

Valuation Picture

Shares of Aqua America are going for about 23.8 times forward estimates, which seems a bit pricey but should not disappoint investors given the utility’s earnings and dividend growth outlook. But more importantly, the trailing 12-month return on equity (ROE) of 10.7% – much better than its peer group average of 9.3% – speaks to Aqua America’s solid management that churns out consistent results year after year.

Market Performance & Technicals

Aqua America operates in an industry where large earnings surprises are relatively unheard of and, therefore, the stock more often than not trades at a decent level without wild movements. But since mid-April, shares have been in an upward channel, rising approximately 20% and setting a new 52-week high in the process. As drought-like conditions continue to scorch the U.S., the stock looks poised to add to its gains.

Opportunities for drinking water suppliers like Aqua America are set to improve, as it captures the economic benefit of dealing with a natural resource with no substitute and future projected demand/supply imbalance.

Founded in 1886, Bryn Mawr, Pennsylvania–based Aqua America is one of the largest publicly traded regulated water and wastewater utility holding companies in the U.S., catering to almost 3 million residents across a number of states.