Updated on October 29th, 2024 by Felix Martinez
California Water Service (CWT) has an amazing track record when it comes to increasing dividends to shareholders. CWT is part of the Dividend Kings, a group of stocks that have raised their payouts for at least 50 consecutive years.
You can see 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:
Impressively, CWT has paid 314 consecutive quarterly dividends.
The Dividend Kings are the “best of the best” when it comes to rewarding shareholders with cash. This article will discuss California Water Service’s dividend, valuation, and outlook.
Business Overview
California Water Service is a water stock and is the third-largest publicly-owned water utility in the United States.
It was founded in 1926 and has six subsidiaries that provide water to approximately 2 million people in 100 communities, primarily in California but also in Washington, New Mexico and Hawaii.
Like the vast majority of utility companies, California Water Service is a slow-growth company. Utilities spend excessive amounts on expanding and maintaining their infrastructure, accumulating high debt loads.
As a result, utilities rely on regulatory authorities to approve rate hikes every year. These rate hikes aim to help utilities service their debt, but they usually result in modest revenue and earnings growth. Regulatory authorities have an incentive to offer attractive rate hikes to utilities to encourage them to invest in infrastructure.
On the other hand, authorities offer limited rate hikes to keep customers satisfied. The reliable rate hikes that utilities enjoy result in a resilient business model characterized by fairly predictable cash flows and earnings growth.
This is clearly reflected in California Water Service’s exceptional dividend growth record. The company has raised its dividend for 56 consecutive years and projects a payout ratio of just over 37% for 2024.
Source: Investor Presentation
The company reported a strong financial performance for the second quarter of 2024. It achieved diluted earnings per share of $0.70, a significant increase from $0.17 in the same period last year. Over the first half of 2024, California Water invested $214.4 million in infrastructure improvements, reflecting its commitment to enhancing water system resilience and quality. Additionally, the company declared its 318th consecutive quarterly dividend at $0.28 per share and maintained its A+ credit rating from S&P Global.
The company’s financial growth has been supported by rate increases and accrued revenues under the 2021 California General Rate Case (GRC), which added $131.5 million in revenue for the first half of 2024. Operating revenue for Q2 reached $244.3 million, up from $194.0 million in Q2 2023, driven by rate adjustments and water use increases. Operating expenses also rose by $18.0 million in the quarter due to higher water production costs and increased tax expenses. Year-to-date net income climbed to $110.5 million, a turnaround from a $12.7 million loss during the same period last year.
Looking ahead, California Water’s largest subsidiary, Cal Water, has filed a new GRC proposal for 2025-2027, which includes $1.6 billion in planned investments across its California water systems. A notable feature of the proposal is the Low-Use Water Equity Program, aimed at supporting low-income customers by decoupling revenues from water sales. Additionally, Cal Water has proposed a four-tier rate design that aligns with conservation goals while allowing the utility to achieve its authorized revenue targets. If approved, rate increases of 17.1% in 2026, followed by 7.7% and 8.1% in 2027 and 2028, respectively, would fund these critical investments.
We expect the company to grow its earnings per share by 5% over the next five years and to earn $3.00 per share in 2024.
Growth Prospects
As mentioned above, utilities rely on modest rate hikes by regulatory authorities year after year, and thus, they are mostly slow-growth stocks. California Water Service is no exception to this, as it has grown its earnings per share at a 7.6% average annual rate over the last decade.
We expect the company to grow its earnings per share by an average of 5% per year over the next five years. Continued rate hikes will be one major driver of earnings growth.
Earnings growth should be achievable in the long run thanks to the rate hikes regularly approved by relevant authorities/regulators.
Regulators must continuously encourage the company to keep investing in expanding and maintaining its network.
Customers are dependent on high–quality infrastructure that will remain reliable in the future, which is why future rate increases are almost a given.
Another growth catalyst for California Water Service is acquisitions. Companies in many industries, including utilities, generate inorganic growth by simply acquiring new customers.
Source: Investor Presentation
Overall, we expect California Water Service to grow its earnings per share at an average annual rate of 5% over the next five years, which is roughly in line with its historical long-term growth rate.
Competitive Advantages & Recession Performance
Utilities invest enormous amounts in maintaining and expanding their networks. These investments result in high debt, but they also form extremely high barriers to entry for potential competitors.
New competitors cannot enter the markets in which California Water Service operates. Overall, utilities have the widest business moat investors can hope for.
In addition, while the vast majority of companies suffer during recessions, water utilities are among the most resilient companies during such periods, as economic downturns do not affect the amount of water customers consume.
The resilience of California Water Service was evident in the Great Recession. Its earnings-per-share during the Great Recession are below:
- 2007 earnings-per-share of $0.75
- 2008 earnings-per-share of $0.95 (27% increase)
- 2009 earnings-per-share of $0.97 (2% increase)
- 2010 earnings-per-share of $0.90 (7% decrease)
Therefore, not only did California Water Service not incur a decrease in its earnings during the Great Recession, but it grew its earnings per share by 20% throughout the 3-year period of 2007-2010. That performance was in sharp contrast to the performance of the vast majority of companies, which saw their earnings collapse during the Great Recession.
California Water Service’s exceptional resilience was also evident in the 2020 economic downturn caused by the coronavirus pandemic. While most companies incurred a material decrease in earnings during this period, California Water Service grew its earnings per share by a staggering 50% in 2020.
California Water Service is one of the most resilient companies during recessions and bear markets.
Valuation & Expected Returns
California Water Service is expected to generate earnings per share of $3.00 this year. As a result, the stock is currently trading at a price-to-earnings ratio of 17.21. This is a low valuation multiple for a utility stock, which is a slow-growth stock. We consider 20.0 to be a fair earnings multiple for this stock.
If California Water Service reverts to our assumed fair price-to-earnings ratio of 20.0 over the next five years, it will incur a 3.0% annualized tailwind in its returns. This could help with the positive returns of earnings-per-share growth and dividends.
The stock offers a dividend yield of just 2.1%, which is lower than the current inflation rate of 3.6%.
Through the combination of expected earnings-per-share growth, valuation changes, and dividends, we believe California Water Service is likely to offer an average annual total return of 10.1% over the next five years.
Final Thoughts
California Water Service has exhibited an exceptional dividend growth record thanks to its reliable earnings growth, which is secured by rate hikes that are approved by regulatory authorities.
In addition, thanks to its healthy payout ratio and its solid business model, the company should easily continue raising its dividend at a mid-single-digit rate for many more years.
While California Water Service is a “boring” stock, it is exceptionally resilient during recessions. When most companies see their earnings collapse, California Water Service provides a safe haven to investors.
As a result, we currently rate this utility as a Buy.
The following articles contain stocks with very long dividend or corporate histories, ripe for selection for dividend growth investors:
- The High Yield Dividend Aristocrats Listis comprised of the 20 Dividend Aristocrats with the highest current yields.
- The Dividend Achievers Listis comprised of ~400 stocks with 10+ years of consecutive dividend increases.
- The High Yield Dividend Kings Listis comprised of the 20 Dividend Kings with the highest current yields.
- The Blue Chip Stocks List: stocks that qualify as Dividend Achievers, Dividend Aristocrats, and/or Dividend Kings
- The High Dividend Stocks List: stocks that appeal to investors interested in the highest yields of 5% or more.
- The Monthly Dividend Stocks List: stocks that pay dividends every month, for 12 dividend payments per year.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500.