American States: Top pick in water

by Ian Wyatt, editor $100k Portfolio

As drought and water shortage become more commonplace, billions if not trillions of dollars will flood into the hands of businesses that will provide relief in the form of new water recovery technologies, infrastructure, and conservation techniques.

That's why I feel one of the best investments is to own water and waste water utility stocks. And within this industry, American States Water (AWR) is my top pick.

This company has a long history of providing quality water and water replacement services for the past eight decades. And in the past 58 years, they've raised their dividend to shareholders 58 times.

Its technologies, expertise and water-saving techniques this company provides help to ensure that the water continues to flow.

And I believe this service will only continue to grow and become more profitable and necessary as this country grows its population and uses up more water every year.

A safe investment has the ability to survive and reward its shareholders during any economic period. A safe investment is able to ignore economic cycles and operate outside of policy shifts. Few investments can manage to largely avoid both of the influences. But water is one of them.

AWR provides electric and water services, although water comprises more than 90% of total revenues. It is engaged in the purchase, production, distribution and sale of water in 75 communities and 10 counties in California, including drought-prone Los Angeles.

The company also provides water services to military bases, such as Fort Bliss near El Paso. A big plus is the duration of its military contract -- 50 years.

Analysts consider utility companies defensive investments because people need electricity, gas and water services all the time, resulting in stable earnings during tough economic cycles.

The stable earnings make valuing utility stocks easier, which means they are less prone to big misses in earnings or huge swings in share price. In fact, AWR managed to nearly double earnings in the past three years -- from $22 million in 2008 to $42 million in 2011.  

And the stable earnings provide yet another benefit -- it lets management declare a reliable dividend each quarter.

American States Water has paid dividends to shareholders every year since 1931, increasing the dividends each calendar year since 1954 -- that's a 58-year record of increasing payouts to shareholders.

In fact, management announced an eye popping 27% increase to the dividend on August 2. The new yield is 3.2%, paid on a quarterly schedule.

Stable earnings and dividend provide some measure of safety, but the monopoly status is what makes utility stocks such an attractive investment. This industry has extreme barriers to entry and there are no substitutes for fresh water, providing a major competitive advantage.

Though an 18 P/E ratio may appear high for a utility stock, the industry average is 23.5. So there's plenty of upside from a price perspective.

Furthermore, analysts appear lukewarm toward the stock -- two analysts consider AWR a buy, while five rate it a hold.  While that may sound like a negative, it tells me that AWR is unde-rappreciated, leaving plenty of opportunity for future upgrades.

The shares are up about 26% so far this year and 40% from the 52-week low reached last October. The surge has pushed the shares above resistance at 35 to an all-time high.  Is it a coincidence that this rally has coincided with the hottest period in U.S. recorded weather history?

The recent surge suggests that investors are starting to catch on to the value of water and water companies. With solid fundamentals providing a robust foundation, I expect the shares to continue their recent run-up.

Sure, we've missed out on some recent upside.  But the drought and need for finite water resources will not abate anytime soon.  -Now is the time to jump aboard water stocks, and AWR is the best candidate in this under-appreciated sector.  -And don't forget the tidy 3.2% yield as well.

Learn more about this financial newsletter at Ian Wyatt's $100k Portfolio.

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