The Prudent Investor

Removing Middlesex Water Company
February 15, 2007, 7:59 am
Filed under: Water Utilities

There are positive things to be said about Middlesex Water Company, and I can understand one’s decision to add it to their portfolio. I wish that Investor Relations had responded to my request for information, as the possibility of a 5% break on the stock price, combined with a 3.6% dividend yield, is quite appealing. “Back in the day” when I was writing for The Motley Fool, I wrote about companies that offered a discount on purchases through their DRiP. When used as the sole criteria for selection, this worked as a poor idea, but for an excellent company it was icing on the cake.

For me, the primary component that discourages me from selecting the company comes from its capitalization. Unlike American States Water, which noted in their 10-Q that their revenue was not going to keep up with their expenditures, Middlesex Water Company does not state this, but implies it in their latest filing. Their request to issue an additional one and a half million shares of stock acts as a dilution to current shareholders, and their application for an additional five million dollars of debt only serves to increase their Debt to Equity ratio (currently at 1.4, which is higher than I would like to see).

Their stock price has stagnated over time, and we are looking to make purchases over time. Although it has had its ups and downs, the price is essentially the same now as it was five years ago (the 52 week change at this point is 0.2%). This is why the question surrounding the possible break on purchase price through their Dividend Reinvestment Plan was so important. A negative Leveraged Free Cash Flow, which is the free cash flow following payment for the interest on debt and the dividends to shareholders, does not help its case.

Nor does current litigation against the company help its case. All companies have to deal with litigation as part of their operations, but there is a potential that 68 community systems which Middlesex Water Company serves may be forced into corrective action, which would require the issuance of even more debt and or stock.

These concerns combine with the fact that this is a small ($220 million Market Cap) company, and that is the rub. The smaller the company, the bigger deal concerns of this nature becomes.

So for these reasons, I am removing Middlesex Water Company from my list of consideration.

This narrows the initial group of ten down to two companies, California Water Service Group and SJW Corp. Next week I look a little more closely at these two companies in an attempt to decide which will be selected for a multiple long-term purchases.


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