TAKING STOCK: Water utilities

Dear Mr. Berko:

What is your opinion of the water industry -- especially Middlesex Water Co., which pays a 3.5 percent dividend. We'd like to buy several water utilities to add to our portfolio of telephone, gas and electric utilities. We are conservative investors and have just under $9,800 to invest in our account. In addition to our 11 utility issues, which account for 65 percent of our stocks, our portfolio consists of six of the issues that make up the Dow Jones industrial average, plus two railroad stocks.

We have been reinvesting all our dividends as you told us to do 34 years ago, when we first began reading your column. We've never sold a share of stock, and our account is worth $371,000 today. We are both 55 and hope to retire in 12 years with our pensions, our Social Security (if it's there) and our stock dividends.

-- GL, Fort Walton Beach, Fla.

Dear GL:

You folks who buy good stocks, hold them for decades and reinvest the dividends are un-American. How do you expect stockbrokers to earn a living?

Because municipalities that provide water services to their residents are compensated via fees and taxes, there are only eight investor-owned water utilities in the U.S. So with the exception of certain states and big cities, most water utilities are small companies, ranging between several hundred customers and a few thousand. Municipalities have been capable of managing their water resources, but this is changing because America's water infrastructure is old and badly underfunded. It's estimated that municipalities will have to spend at least $1.2 trillion over the coming 25 years to modernize their systems. For instance, the highly regarded New York City Water Supply System is $29 billion in debt, and that amount may reach $37 billion in the next decade.

Because many municipalities are running short on money to upgrade and maintain their facilities, we're seeing larger public water utilities buying smaller private utilities all over the country. Aqua America Inc. (WTR-$24.30) purchased 18 municipal systems last year and will add 20 more before this year ends. The pitch is simple: WTR is a large, experienced, well-managed water utility with the money and ability to bring a water system up to date. This trend should accelerate as cash-strapped municipalities struggle to balance their budgets. Therefore, the long-term growth prospects in this industry appear significant.

Middlesex Water (MSEX-$21) -- with some 60,000 customers, primarily in Middlesex, N.J. -- has increased its revenues from $25 million in 1995 to $115 million this year. Its dividend has increased in each of those years, from 55 cents to 76 cents, an average of 1.7 percent a year, which really stinks. MSEX's earnings progress has been remarkably unremarkable, and weak management recently lost several big contracts. Though its dividend is the highest in the industry, I believe that the remaining seven water utilities offer higher potential returns. But though I don't care for MSEX, some big names on the Street believe that it will go gangbusters in the next two years.

WTR, mentioned above, has $800 million in revenues and an excellent record of revenue and dividend growth. The current 61-cent dividend yields 2.5 percent and may be raised to 70 cents next year on strong earnings and revenue growth. WTR -- with 3 million customers in Pennsylvania, Ohio, Texas, Illinois, North Carolina, Florida, New Jersey and Texas -- is considered a strong long-term buy. So is American Water Works Co. Inc. (AWK-$42), with a 2.6 percent yield and $3.1 billion in revenues from 14 million customers, which is the granddaddy of this sector. Future revenue, earnings and dividend growth look strong, and AWK has cultivated excellent regulatory relations in the 30 states in which it operates. Management keeps its cost structure lean, providing a good framework for annual earnings growth of 7 percent and annual dividend growth of 6 percent during the next few years.

Consider owning 100 shares of each of those stocks. If consolidation in the industry continues, those issues could provide you with generously above-average returns over the next decade.


Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2013 Creators Syndicate Inc.

Published: Mon, Dec 2, 2013