Utilities provide basic services and are not affected by the vagaries of the economy. These are preferred by investors due to stability of operations and their capability to reward shareholders with regular dividend payments.
Utility operation is capital intensive as consistent investment is required to maintain and replace older pipelines and water mains, upgrade storage facilities, as well as setup and develop new water refinery units. Hence, apart from internal sources of funds, water utilities depend on the credit market for funds to carry on upgradation activities.
Massive funding will be needed to upgrade the quality of the U.S. water infrastructure. One of the primary reasons for weakening of the water infrastructure is the gradual decline in Federal government funding of water infrastructure projects. Per new forecast from Bluefield Research, more than $638 billion will be needed to be invested over the next decade to upgrade the existing water and wastewater assets of the United States.
Customer additions, new water rates, strategic acquisitions and ongoing capital investments are driving the water utility stocks.
Amid the above backdrop, let’s focus on two Zacks Utility – Water Supply industry stocks, namely American States Water Company (AWR - Free Report) and SJW Group (SJW - Free Report) , to ascertain which is a better investment option for 2019. Steady performance, along with stable earnings and cash flow enable these companies to reward investors through regular dividends.
American States Water, currently carrying a Zacks Rank #2 (Buy), has a market capitalization of $2.46 billion. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
SJW Group, currently carrying a Zacks Rank #3 (Hold), has a market capitalization of nearly $1.58 billion.
Shares of American States Water have returned 19% against SJW Group’s decline of 11.5% in the past 12 months. The industry recorded a decline of 2.6% over the same period.
One Year Price Performance
The debt-to-capital ratio is a good indicator of the financial position of a company. The indicator shows how much debt is used to run the business. American States Water and SJW Group’s debt-to-capital ratio stands at 38.78% and 47.59%, respectively, compared with the industry’s 42.7%.
Return on Equity (ROE)
ROE is a measure of a company’s efficiency in utilizing its shareholders’ funds. In the trailing 12 months, ROE of American States Water and SJW Group was 11.75% and 10.92%, respectively. Both the companies outperformed the industry’s ROE of 10.74%.
Long-Term Earnings Growth and Surprise Trend
Earnings of American States Water are expected to improve 6% in the long term (three to five years).
SJW Group outpaced the Zacks Consensus Estimate and recorded average positive earnings surprise of 4.26% in the last four quarters. On the contrary, American States Water reported negative surprise of 4.21% in the same time period.
For 2019, the Zacks Consensus Estimate for American States Water has moved up 3.09% to $2 in the past 60 days, while the same for SJW Group remained unchanged at $2.37 per share over the same time frame.
Utility companies generally distribute dividends. Currently, the dividend yield for American States Water stands at 1.64%, lower than 2.01% for SJW Group. American States Water’s dividend yield is also lower than the industry’s 2.01%.
Markedly, it is quite evident from the above comparisons that American States Water is a better water utility stock to accumulate.
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