Sure Dividend

High-Quality Dividend Stocks, Long-Term Plan
Member's Area

Dividend Kings In Focus: SJW Group


Updated on October 31st, 2024 by Aristofanis Papadatos

Companies that have at least 50 years of dividend growth are considered Dividend Kings. These stocks are some of the most widely owned and followed stocks among income investors.

You can see the full list of all 53 Dividend Kings here.

You can also download an Excel spreadsheet with the full list of Dividend Kings (plus important metrics such as price-to-earnings ratios and dividend yields) by clicking on the link below:

 

Click here to instantly download your free spreadsheet of all Dividend Kings now, along with important investing metrics.

You might be surprised to find that there are some small cap names that have also raised their dividend for at least the past 50+ years. One such company is SJW Group (SJW), a ‘water stock‘ utility company.

This article will examine SJW’s business, growth prospects, and valuation in order to determine if shares are worth purchasing now.

Business Overview

SJW was founded in 1866 and was initially known as the San Jose Water Company. With a market cap of $1.9 billion, SJW is one of the smallest Dividend Kings.

SJW is a water utility company that purchases, stores, purifies, and distributes water to consumers and businesses.

Source: Investor Presentation

Following the completed merger with Connecticut Water Service (CTWS), SJW currently consists of five subsidiaries:

San Jose Water Company, a regulated utility, has nearly 230,000 connections and provides water to roughly one million well-educated and affluent customers in the Silicon Valley area. The purchase of CTWS added 138,000 connections and 450,000 customers in Connecticut and Maine.

SJWTX is a regulated water utility company that has 25,000 connections in the area between San Antonio and Austin, Texas. Water utilities supply almost all revenues for SJW, but there is a real estate portion of the company as well.

SJW Land owns and develops properties for both residential and warehouse customers in California and Tennessee. SJW uses the rental income from these properties to reinvest in its water utility business.

Growth Prospects

On October 28th, 2024, SJW Group reported third quarter results for the period ending June 30th, 2024. Revenue grew 10% to $225.1 million, beating the analysts’ estimates by $11.6 million.

Earnings-per-share grew 4%, from $1.13 to $1.18, beating the analysts’ consensus by $0.04. The utility has missed the analysts’ earnings-per-share estimates only once in the last 9 quarters.

As in recent quarters, the improvement in revenue resulted primarily from SJW Group’s California and Connecticut businesses, which benefited from higher water rates, while growth in customers aided the Texas business.

Higher rates overall added $40 million to results for the quarter, higher customer usage added $4.8 million, and growth in customers contributed $2.4 million.

Source: Investor Presentation

Prior to the merger, California contributed 92% of SJW’s income. In the most recent quarter, however, this figure was down to 57%. Connecticut is the second-largest source of income at 34%, with the remaining states of Texas, Tennessee, and Maine making up the rest.

SJW still relies on just two states for the vast majority of its income but is slightly less top-heavy than before the merger. The combination of SJW and CTWS has made the combined company the third-largest investor-owned water utility company in terms of both enterprise value and rate base.

The combined entity has nearly 406,000 service connections and provides services to 1.5 million people.

SJW has compounded its earnings per share at an average annual rate of only 0.6% over the last decade but it has grown its earnings per share by 15% per year on average over the last five years. The impressive performance in the last five years has resulted primarily from the merger with CTWS in 2018.

CTWS was no slouch either when it came to earnings growth, as the company has compounded earnings-per-share by 6.7% annually in the decade leading up to the merger.

We expect that the combined company will be able to generate earnings growth of 8.0% per year on average through 2029.

Competitive Advantages & Recession Performance

As a regulated utility, SJW is restricted in how much it can raise rates for customers. Fortunately for the company, they operate in areas, i.e., Silicon Valley and Central Texas, which have seen high population growth rates.

As these populations grow, they need reliable access to water. To encourage SJW to spend on improving the water infrastructure in these areas, local governments allow the company to raise rates at fairly high levels.

For example, San Jose Water received approval for a rate increase of 9.8%, 3.7%, and 5.2% for 2019, 2020, and 2021, respectively. Large rate increases should flow right to the company’s bottom line.

Another advantage for SJW was tax reform legislation that went into effect in 2018. Tax reform actually lowered SJW’s tax rate from 37% in 2017 to 20% in 2018. The impact of tax reform will continue going forward.

In the first half of 2023, the company actually posted a negative effective tax rate of 9% due to the partial release of uncertain tax position reserve.

However, even in the prior period, when no such one-off circumstance took place, the company paid a 17% consolidated income tax rate. Moreover, in the last 12 months, SJW has reported a 10% income tax rate.

Between a lower tax rate and the additional income from the merger with CTWS, SJW has an opportunity to offer robust dividend growth going forward.

SJW has paid an uninterrupted dividend for the past 80 years. The company has raised its dividend for the past 56 years. The average raise in the decade before the merger was 4.8%.

In recent years, the company rewarded shareholders with a 7.1% increase in 2019, a 6.7% raise in 2020, a 6.3% increase in 2021, a 5.9% raise in 2022, a 5.6% raise in 2023 and a 5.3% raise in 2024. Shares of SJW yield 2.9% at the moment.

Source: Investor Presentation

While future growth looks attractive thanks to the company’s merger with CTWS, it is also important to examine how a company performed during tough economic times. SJW’s earnings-per-share during the Great Recession are below:

SJW was not immune to the last recession as earnings-per-share declined 22% from 2007 through 2009. While earnings growth did return in the next year, it took the company until 2014 to top its pre-recession high.

Water remains a crucial resource for consumers even during a recession, but SJW’s performance during and after the last financial crisis shows that growth can be elusive. That said, the company’s more diversified business model today makes it likely that the next recession won’t be as severe for SJW.

Valuation & Expected Returns

SJW reaffirmed its guidance for 2024 and expects earnings per share of $2.68 to $2.78 for the full fiscal year. Using the current share price of $56 and the midpoint of expected earnings per share for the year, the stock has a price-to-earnings ratio of 20.5.

This compares favorably to our target price-to-earnings ratio of 26, which is a premium to the stock’s pre-merger 10-year average multiple. If the stock trades at our target valuation level by 2029, it will enjoy a 4.9% annualized valuation tailwind in its returns.

Going forward, investors can expect total returns to be the following:

In total, we expect shares of SJW to offer an average annual return of 15.2% over the next five years.

Final Thoughts

SJW’s merger with CTWS has helped diversify the company’s business model, making the combined entity less reliant on California for income. SJW is still top-heavy, with just two states contributing over 85% of income, but this is an improvement over each individual company prior to the merger.

SJW also has a very long history of dividend growth and is one of just 53 companies with at least five decades of dividend growth. This is an impressive accomplishment.

With an impressive track record of dividend growth and SJW’s projected to achieve double-digit returns over the medium term, we assign the stock a buy rating.

Additional Reading

The following articles contain stocks with very long dividend or corporate histories, ripe for selection for dividend growth investors:

Thanks for reading this article. Please send any feedback, corrections, or questions to support@suredividend.com.



articles
Golden Rule Commitment
contact - legal - testimonials