The strategy behind Global Water’s asset base makes sense; Areas with growing populations and relatively scarce water supplies are likely to have a steadily increasing demand for water. Global Water is well positioned for this.
Global Water has many tailwinds, including csignificant growth in supplies of recycled water (8.3% YoY growth), massive rate increased (requested 13.4% interest rate hike by 2022), and the solid population growth in Phoenix (17.8% since 2010).
The regulated annual revenues have grown rapidly over the years. Since water is a necessary commodity, the consumption of which usually does not correlate with macroeconomic events, income should remain stable during a possible recession, as was the case during the Great Recession.
Source: annual report
We see organic growth contributions from rate increases, which on an annual average again increase in the low single-digit range. Like other utilities, Global Water can pass approved price increases on to its customers, providing a steady, long-term tailwind to sales.
The company has several growth impulses. In the first quarter, Global Water entered in a Framework agreement with Nikola Corporation (NKLA) to provide water and wastewater services for their new facility Factory in Coolidge, Arizona.
It also sosigned agreements to acquire two small water utility companies, Twin Hawks Utility ad Rincon Water Company, continues reinvestment/ expansionary Strategy.
Taken together, we anticipate annual EPS growth of 6% for Global Water over the next five years.
Water stocks are valued for their stable dividends and steady dividend growth. Global Water has been paying a monthly dividend since May 2016, with a handful of increases over that time from the initial two cents per monthly share.
The current payout is $ 0.0243 per share monthly or $ 0.2916 per share annually and will continue to be paid over the current COVID-19 affected environment.
This results in a current return of 1.7%, which is low for a utility share. And we are concerned about dividend security as Global Water’s earnings have not covered the dividend in recent years.
Earnings for 2018 and 2019 were just $ 0.15 and $ 0.10, respectively, and continued to decline to $ 0.05 per share in 2020. As a result, Global Water paid out much higher dividends during that period, in excess of earnings per share. That means it has a significant underfunding and will need to fund the payout in other ways, including debt and equity issues.
However, we expect EPS to rebound to $ 0.40 in 2021, which would cover the annualized dividend payout. Assuming another major economic downturn, we believe the dividend should be sustainable. However, given the fact that a payout ratio of well over 100% has been maintained in recent years, this cannot be guaranteed.
We believe Global Water has a positive path ahead of it when it comes to earnings growth. We believe revenue growth is all but certain given the company’s organic sources of growth. But we also see rising interest and maintenance costs as dampening margins, as we have for years.
With a dividend yield of less than 2%, we see the risk of owning the stock well above profit. Despite the attractive monthly payouts, we do not recommend any Global Water Resources shares.