The strategy behind Global Water’s asset base makes sense; areas with population growth and relatively scarce water supplies should see ever-rising demand for water. Global Water is well-positioned to grow in such areas.
The utility has many tailwinds, including considerable growth in its recycled water deliveries (9.0% growth year-over-year), massive rate increases (requested 13.4% rate increase through 2022), and the solid population growth in Phoenix (21.7% since 2010).
Its regulated annual revenues have been growing consistently over the years. During the last decade, the company has grown its revenues at a 2.5% average annual rate. Water is an essential commodity, so its consumption is resilient even under the most adverse economic conditions. As a result, the revenues of Global Water should remain resilient during a potential recession, as was the case during the Great Recession.
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We expect organic growth contributions from rate increases, which amounts to another low-single-digit gain annually, on average. Like other utilities, Global Water is able to pass through approved pricing increases to its customers, which is a steady, long-term tailwind to revenue.
Overall, thanks to material rate hikes and the sustained expansion of Global Water, we expect the utility to grow its earnings per share at a 6.0% average annual rate over the next five years.
Dividend Analysis
Water stocks are prized for their stable dividends and consistent dividend growth. Global Water has paid a monthly dividend since May of 2016, with a handful of monthly raises from the initial two cents per share.
The current payout is $0.0248 per share monthly, or $0.30 per share annually, and was not affected throughout the worst of the coronavirus crisis.
This results in a current yield of 2.3%, which is low for a utility stock. In addition, we are concerned about the dividend’s safety, as Global Water’s earnings haven’t covered the dividend in recent years.
Earnings per share for 2021, 2022, and 2023 came in at just $0.15, $0.30, and $0.26, respectively, whereas the annual dividends were $0.29, $0.30, and $0.27 in those years. In other words, Global Water paid out much higher dividends than its earnings during that period. This means that the company has a significant shortfall and must fund the payout through other means, including debt and share issuances.
The dividend growth rate is another feature of Global Water. The company has grown its dividend at a 6.8% average annual rate since it became public, eight years ago. This growth rate is higher than the 5-year median dividend growth rate of 5.6% of the utility sector.
On the bright side, we expect Global Water’s earnings per share to recover to $0.30 in 2024. In such a case, the payout ratio would be 100%. Moreover, thanks to its regulated business and the reliable cash flows resulting from its business model, Global Water can easily borrow funds to support its future dividend. Nevertheless, given the recent years of maintaining a payout ratio well above 100%, the dividend should not be considered entirely safe in the long run.
Final Thoughts
We think Global Water has a positive road ahead when it comes to earnings growth. Given the multiple sources of organic growth, the company is in a reliable revenue growth trajectory. However, we also see rising interest expenses and maintenance costs keeping a lid on margins, as they have for years.
With the dividend yield at 2.3%, we see the risk of owning the stock as far outweighing the reward. Despite the merits of receiving dividends on a monthly basis, we do not recommend purchasing the stock of Global Water Resources.
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