American States Water

The lucrative business of water

Sure, this headline is easy to misunderstand. Clean drinking water should be a basic right for every human being - but unfortunately it isn't. Time and again you read articles about corporations that privatize water sources and then make a very lucrative business out of it. And that quickly brings us back to the topic of morally justifiable investments. In my view, though, as a shareholder you can invest your money in the American States Water Company with a clear conscience.

The holding company from California operates as a water and electric utility and serves over a million people in 9 states. The Golden State Water Company, one of its subsidiaries, provides drinking water to more than 261,000 customer connections in over 80 communities. It also distributes electricity to around 24,000 connections. And American States Utility Services Inc. operates and maintains water and wastewater systems on US military bases.

The origins and business model of the American States Water Company

Our story begins in 1855 in the Northern Irish city of Belfast, when William Mulholland is born. In the 1870s he emigrated to New York City, but ultimately moved to California. There he initially worked as a laborer for the Los Angeles Water Company. The city's water supply was outdated and in the hands of the entrepreneur Frederick Eaton. Thanks to his thirst for knowledge and his friendship with Eaton, Mulholland was put in charge of the operation in 1886. In 1904 the two traveled to the Owens Valley to buy water rights. Using various tricks they outwitted the locals, and in 1907 Mulholland was able to start building his aqueduct. Only thanks to this pipeline was Los Angeles able to grow and reach its present size. Owens Lake had already dried up completely by 1928.

But what does this have to do with the American States Water Company? No, it didn't grow out of the Los Angeles Water Company, but it was an important introduction for understanding the circumstances better. Mulholland's aqueduct was good, but it didn't organize the local distribution of the water, which is why most Southern California communities decided to build their own waterworks. Eventually a group of Chicago investors decided to buy up some of these small operations and run them under central management with private financing. On April 16, 1928, they founded their holding company called the American States Public Service Company. They intended to invest in utilities all over America, but quickly took notice of the Southern California water market. The engineer John C. Rath was sent out with the authority to buy smaller waterworks. Within 8 months he bought 33 systems for a total of 5.8 million dollars. His most significant acquisition was the purchase of the Los Angeles Water Service Company for 640 thousand US dollars. When Rath was assigned to other duties, he handed over management to the young sanitary engineer Cornelius Prugh Harnish. Thanks to his expertise, the water quality of the systems improved considerably. At that point the company already had 43,000 customers in 31 communities. The systems were continuously expanded and modernized. It wasn't until 2005 that all the California systems were bundled under the new name Golden State Water Company.

To expand the business further, the company also got into electric utilities early on. In 1938 it acquired the Bear Valley Electric Service Company. This energy provider supplies the Big Bear Valley in the San Bernardino Mountains with electricity. From 147 customers in 1938, the number has grown to over 24,000 customers today. In 1998 the company founded American States Utility Services Inc. and signed various service contracts with the US government, some of which run for more than 50 years. Here it takes care of the entire water supply and wastewater disposal on what are now more than 10 military bases across the US. The American States Water Company may be a rather small player compared to its competitors, but it shines with a first-class dividend policy.

What else does the future hold for American States Water?

The fact is that water, or more precisely fresh water, is essential to life. Without water, life isn't possible - we need it to quench our thirst, to water our plants or to take care of our animals. And there's also no question that water is a scarce and precious resource that won't suddenly become available in abundance anytime soon. On the contrary: water demand will continue to rise significantly. On the one hand, that's of course due to the steadily growing world population. Even though we no longer have the high birth rates of a few decades ago, the number of people will still keep rising for a while. In addition, demand for water rises along with growing prosperity. Especially in industrialized countries, an enormous amount of water is being consumed right now. Last but not least, climate change also contributes to rising demand for drinking water in the near future. Many regions are already struggling with drought and dryness today, and the Sunshine State of California knows a thing or two about that as well. So a stable water supply is becoming more and more important there.

For the company American States Water, though, I foresee a very positive future. It will certainly keep buying up more systems to broaden its footprint even further. It's also unlikely that prices for drinking water will fall anytime soon. In the long run, water will become ever scarcer and more important, and therefore ever more expensive.

Is the stock worth it for dividend investors?

American States Water paid out its first dividend back in 1931. Since 1954, this distribution has even been raised every year. That means the water utility gets to count itself among the popular Dividend Kings. The dividend yield is currently around 1.4 percent and the dividend growth rate (over 10 years) is 8.8 percent. That's not going to make investors jump for joy, but it's a stable dividend that will very likely keep rising in the future. At around 53%, the payout ratio is perfectly fine.

Conclusion:
Water is the foundation of our lives, and it will become a lot more important in the future. American States Water is well prepared in any case and will keep working on expanding and further developing its systems. With long-term contracts with the US government, it will keep earning good money for a long time to come. So if you're looking for a boring but future-proof investment, in my opinion you're in good hands here.