Evaluating Dividend Potential in the Water Utility Sector

Regulatory Environment Impact

Regulatory environments significantly impact water utility companies' financial performance and dividend potential. Companies like SJW and CWT navigate stringent regulatory constraints, with mechanisms like IRMA and MWRAM boosting revenues. Confidence in regulatory navigation, as expressed by AWK, and strategic decisions subject to regulatory approval, underscore the sector's reliance on regulatory outcomes.

"All but two policy issues have been agreed upon and we are hopeful the CPUC will approve the settlement later this year. In Connecticut, we worked within the constraints of a formidable regulatory environment to complete our general rate case." --- (SJW, earning call, 2024/Q2)

"The implementation of two regulatory mechanisms authorized by the 2021 GRC decision had a significant impact on revenues, with the interim rates memorandum account, or IRMA, adding $80.7 million and the Monterey Style Water Revenue Mechanism, or MWRAM, adding $31.7 million." --- (CWT, earning call, 2024/Q1)

"So again, we remain very confident in our plan and our ability to navigate the regulatory arena." --- (AWK, earning call, 2024/Q1)

"Any strategic combination or acquisition we decide to undertake may also impact our ability to finance our business, affect our compliance with regulatory requirements, and impose additional burdens on our operations." --- (SJW, sec filing, 2024/Q1)

"This was an increase of 15.4% over 2022. Further, based on our current planned capital expenditures and subject to regulatory approval, we estimate that rate base will grow to $2.36 billion by the end of 2024 and $2.47 billion by the end of 2025." --- (CWT, earning call, 2024/Q1)

Capital Expenditure Requirements

Water utility companies are planning significant capital expenditures for 2024: CWT at $365 million, SJW at $332 million, and AWR between $160-$200 million. AWK anticipates $1 billion over five years for regulatory compliance. These investments highlight the sector's substantial capital requirements for infrastructure and regulatory adherence.

"For 2024, our utility capital expenditures are estimated to be $365.0 million." --- (CWT, sec filing, 2024/Q1)

"The company has a capital expenditures budget of $332 million in 2024 and plans to invest more than $1.6 billion in capital over the next five years to build and maintain its water and wastewater operations, including approximately $230 million to install treatment for per- and polyfluoroalkyl substances (PFAS), subject to regulatory approvals and availability of funding." --- (SJW, press release, 2024/04/25)

"Subject to the Company’s continuing review of the NPDWR and the adoption of more stringent requirements by state environmental regulators, as previously disclosed, the Company estimates an investment of approximately $1 billion of capital expenditures to install additional treatment facilities over a five-year period in order to comply with the new regulations." --- (AWK, sec filing, 2024/Q1)

"For the year 2024, the regulated utilities’ company-funded capital expenditures are expected to be between $160 million and $200 million, barring any delays resulting from changes in capital improvement schedules due to unfavorable weather conditions and supply chain issues. Cash Flows from Financing Activities :" --- (AWR, sec filing, 2024/Q1)

"For 2024, we estimate utility capital expenditures to be $365.0 million. As of March 31, 2024, construction work in progress was $321.4 million." --- (CWT, sec filing, 2024/Q1)

Current and Historical Dividend Yields

American Water Works (AWK) and American States Water Company (AWR) both target long-term dividend growth rates of 7-9%, with AWK maintaining a payout ratio of 55-60%. SJW Group has a history of 80 years of dividends, increasing for 56 consecutive years. California Water Service Group (CWT) recently declared a $0.28 quarterly dividend.

""We recognize the value of our dividend and the role it plays in delivering exceptional shareholder value." The company expects to continue its dividend growth within a 7 to 9 percent range over the long term, with a target dividend payout ratio of between 55 and 60 percent of earnings." --- (AWK, press release, 2024/05/01)

"And while we do this, we make sure we execute on our growth strategy and deliver shareholder value, including paying a dividend, which we have faithfully done for 80 straight years and we have raised that dividend for 56 consecutive years." --- (SJW, earning call, 2024/Q2)

"annual dividend increase. And yesterday we declared a quarterly dividend of $0.28 per share for shareholders on record as of May 6, 2024." --- (CWT, earning call, 2024/Q1)

"The company's current policy is to achieve a compound annual growth rate in the dividend of more than 7% over the long-term." --- (AWR, press release, 2024/05/07)

"We have grown our dividend consistently over the last five years, significantly outpacing virtually all of our utility peers, while maintaining a consistent payout ratio of less than 60%." --- (AWK, earning call, 2024/Q1)

Growth Opportunities in the Water Utility Sector

Water utility companies like SJW Group, AWR, and AWK are actively investing in infrastructure and regulated acquisitions to enhance water supply systems and ensure long-term growth. Progressive rate designs, as seen with CWT, also contribute to financial stability and customer satisfaction, further supporting growth opportunities in the sector.

""We continued to deliver on our growth strategy by investing in our water supply and infrastructure across our footprint, as well as reaching an all-party settlement agreement in principle on almost all issues in our California general rate case."" --- (SJW, press release, 2024/07/24)

"Eva will discuss the adjusted results in more detail. At the regulated utilities, we continue to invest in our infrastructure to strengthen our water and electric systems and remain focused on operating the water and electric businesses safely, efficiently and for the long term." --- (AWR, earning call, 2024/Q1)

"We are continuing to invest in regulated acquisition opportunities in Pennsylvania driven by the need for system consolidation and upgrading all for the benefit of communities who deserve safe and reliable water and wastewater service." --- (AWK, earning call, 2024/Q1)

"It also approves a progressive rate design that is intended to provide financial stability while benefiting low-income and low-water-using customers by significantly decreasing the cost of the first six units of water consumed and increasing the percentage of fixed costs that are recovered in the service charge." --- (CWT, press release, 2024/04/25)

"Those are consistent with where water utilities can expect to potentially have savings. Now, it changes from opportunity-to-opportunity." --- (SJW, earning call, 2024/Q1)

Economic Conditions and Market Trends

Water utility companies like SJW and CWT rely on historical trends, current conditions, and future expectations to navigate economic conditions and market trends. These factors significantly influence their performance and, consequently, their dividend potential.

"These statements are based on estimates and assumptions made by the company in light of its experience, historical trends, current conditions and expected future results, as well as other factors that the company believes are appropriate under the circumstances. Many factors could cause the company’s actual results and performance to differ materially from those expressed or implied by the forward-looking statements." --- (SJW, earning call, 2024/Q2)

"Judgments and expectations about us, the water utility industry and general economic conditions." --- (CWT, press release, 2024/04/10)