The Prudent Investor


A Decision On Which Water Utility To Purchase
February 27, 2007, 1:12 pm
Filed under: Water Utilities

At the beginning of the year I started on this two month journey to decide which company would find its first place within my new portfolio. I knew that it would be a water company, but had no idea where the chain of decisions would lead. I finally have an answer.

Either company, California Water Service Group (CWT) or SJW Corporation (SJW), would make an excellent addition to a conservative portfolio, where the intention is to purchase for the long term. I have neither the time nor desire to make trades that last only a few weeks or months, and having taken almost two months to decide which company will begin the portfolio, buying for the short term would make no sense whatsoever.

In addition, many of the other eight companies I removed from consideration would also work nicely as investments. As previously stated, I currently hold Aqua America in a Dividend Reinvestment Program, and having enjoyed a double over the past few years, have removed the initial investment and am now playing with the bank’s money. If the company I now select does that over the next few years then I will be overjoyed, but I hardly expect that to happen.

In the last article I gave SJW a slight nod. There are final factors that I have taken into consideration that have made the decision for me, and the first is the dividend.

Both companies offer a dividend yield. CWT’s Trailing Annual Dividend Yield is 2.8% while SJW’s yield is only 1.6%. Both companies have a long history of increasing dividends, which is always a good thing to see for the long-term investor. A 1.2% difference in the dividend yield is certainly significant and can be meaningful when selecting a company.

Initially, the 1.2% dividend yield was very meaningful in my comparison, but this quickly evaporated for two reasons.

The first reason came when I looked at the dividend increases over the past decade. Whereas CWT has increased its dividend 10% over that period of time, SJW has increased theirs almost 60%. This is not to suggest that SJW’s dividend yield will surpass that of CWT any time soon, but to see a company increase their dividend so much over this period of time is very comforting.

CWT - SJW Comparison

The most significant element, however, comes from an understanding of the dividend yield – it is the dividend divided by the share price. That said; let’s look at a comparison of the share price over the past year. As you can see above, the value of CWT (the black line) has remained relatively flat, while SJW (the red line) has gone up over 40%. A year ago SJW’s dividend yield was 2.2% and CWT’s dividend yield was 2.7%, not nearly as much of a difference. The disparity in the yield was the result of incredible success with the stock price, so SJW has a nicely rising price with the comfort of a dividend – CWT only has the latter.

The second factor comes from the fact that SJW has been successful, albeit in a small way, with their real estate business. I am looking to purchase a water company, and both under consideration are water companies. However, SJW has a small advantage in slightly diversifying a small portion of their company in a successful manner. It is that small, extra bump that I like. Were their land division larger than the 1% it currently holds then I might have tossed the company from consideration. Indeed, I do expect this portion of the company to be a larger part of the whole, but seriously doubt that it will take on a major role. This small chunk of risk is quite appealing.

So my decision has been made to purchase SJW. The concern I presently have is that it may have gone too far, too fast. Again, look at the chart – it made a straight line up, then since the beginning of the year it has fallen back. If I were considering a single purchase then this would be a real concern. However, as I will be making multiple purchases over a long period of time, if I purchase now and it continues to pull back, then making more purchases means that I will get a better price. By planning multiple purchases, I remove much of the problems involved with timing, and reduce my risk.

Next post I’m going to take a breath, gather my wits, and move forward with the first purchase. On Friday I sent a check to Zecco.com to fund my account, and when that money becomes available, I will make the purchase.

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4 Comments so far
Leave a comment

George–SJW doesn’t have a drip program, according to them. I thought you were buying only drip stocks.
Appreciate hearing from you.

Comment by david brotton

David – Right, I check ed with them and they do not offer a DRiP. No, I am not confining my selections to DRiPs. If I do select a company that offers one then I will take advantage of that, but otherwise I will be (and have already been) making my purchases through Zecco.com, as they are fee-free and purchases can be made with limit orders. Thanks for the comment. george

Comment by glsmyth

George,
I just came across your website in researching water utilities. Like you, I’m looking to make a long term investment in a water equity. It seems like an obvious play–it’s growing scarcer and scarcer, and I assume that regulations and competition will only benefit these utilities (correct me if I’m wrong about this). I’m new to investing stocks, so was not able to follow all of your detailed analyses, but was trying to decide between investing in CWT or Aqua America (which seems to have been precluded from your discussion, since you already owned it). Do you think it’s wiser to split my stake between the two companies (paying double commission in the process) or selecting one of the two? And if I only choose one, would you suggest Aqua as the more mainstream, reliable one? I’d be grateful for your advice
thanks a lot,
n

Comment by Nr80

Actually, if you go back further in the blog you’ll see that I did consider Aqua America – here’s a link to the post where I dropped it from the list: http://tinyurl.com/35bm5e

A lot has to do with the portfolio you are putting together, and this portfolio is a relatively conservative one. In other portfolios Aqua America would fit right in, and if you’re new to investing and your timeframe is well ahead of you, then Aqua America might probably be the better choice (CWT might be the safer choice).

I have been purchasing this portfolio through Zecco.com, which has been allowing me to make limit purchases without fees, so that is one thing taken out of the mix (as far as I know, this is the only company allowing no-fee limit purchases).

If you are looking to invest conservatively, then making numerous purchases over a long period of time is a great way to reduce your risk. Purchasing through a fee-free DRiP can really help in doing this. I keep hoping that my selection will end up being a company that has a DRiP, but it just hasn’t happened yet. If you want to learn about Dividend ReInvestment Programs then I’d point you to http://DRiPInvesting.org, where you’ll find not only a boatload of information, but also a community that is more than happy to help with whatever question you might have.

Comment by glsmyth




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