The Prudent Investor

Dropping Consideration of Aqua America
January 23, 2007, 8:01 am
Filed under: Water Utilities

It’s time to narrow things down even more, and at this point I’m going to drop Aqua America, an excellent company to own, and as previously stated, one I currently have in my DRiP portfolio.

There is a lot of good to say about WTR, and it would still be a fine selection for anyone looking to invest in water utilities. The company continues to surge forward with numerous acquisitions every year, and its geographical diversity will help shield it from weather-related difficulties.

That said, the company’s current Price/Sales ratio of 5.8 is just too hard to ignore. I read James P. O’Shaughnessy’s book, “What Works on Wall Street,” and consider its findings to be something that I simply cannot ignore, and P/S is arguably the most important single valuation one can examine. Personally, I have been burned when I have disregarded this number, so it is painful experience that I need to help guide me to the right company.

The only thing that would give me comfort in this area would be the cushion of nice dividend, and with WTR only yielding 1.1%, I cannot bring myself to consider it for a purchase.

I do understand that the low dividend yield has much to do with the fact that this utility is a growth company, thus the need to retain cash for acquisitions, but for the purposes of this particular portfolio I feel that a smaller company will have a better chance to benefit, if only for the fact that it could become a takeover target.

So with this post I drop consideration of Aqua America, which in another portfolio would be a fine choice.


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