Badger Meter

A little-known Dividend Aristocrat

Rightly so, the topic of "sustainable investing" has won over more and more investors in recent years. Investors are increasingly looking for companies that act in an environmentally conscious way, treat their employees fairly and demonstrate transparent and ethical corporate governance. I think this trend is very important and good; after all, it's us investors who decide which company gets our money and which one doesn't. A company that doesn't act according to ESG criteria and whose share price falls as a result might be brought to rethink things that way.

In sustainable investing, our most important resource for life, water, also plays a big role. True to the motto: "What you can't measure, you can't improve." Badger Meter has made it its mission to equip water utilities and municipalities around the world with the most innovative and precise measurement and control technology. So let's take a closer look at the Wisconsin-based company.

The history and business model of Badger Meter Inc.

The year is 1900, on Lake Michigan north of Chicago. The winter in Milwaukee was harsh, the ice-cold winds were stormy and temperatures dropped rapidly. Families huddled together in their homes to keep each other warm. Nothing was safe from these freezing winters; even water pipes in unheated basements threatened to freeze and burst. The water meters that the city administration had only recently had installed to measure its residents' water consumption were also vulnerable to these temperatures. The two local tinkerers Albert E. Gumz and Albert W. Wingender recognized this problem and began experimenting with different metals. In 1902 they had their breakthrough and filed their "frost-proof" water meter with the patent office. Their innovation was a soft cast-iron bottom plate that broke as soon as the water in the meter froze, relieving the pressure and preventing damage to the expensive working parts. Replacing the bottom plate afterwards was easy and inexpensive.

The two founders Gumz and Wingender rented a small machine shop in downtown Milwaukee and began producing their water meters. They quickly realized they needed more capital to grow. So they went looking for investors and came across two local businessmen, Frederick C. Bogk and John J. Leach, who were willing to invest in the young company. Soon afterwards, on the afternoon of March 8, 1905, the four men met to formally found the Badger Meter Manufacturing Company. By the way, Wisconsin bears the nickname Badger State because in the early 1820s, when mining was booming there, thousands of miners temporarily lived in caves they dug themselves - just like a badger. Business went well and grew solidly over the next few years. By 1910 the company was already selling just under 3,700 water meters a year at about 8 dollars apiece. By 1918 it had increased that number to 10,000 meters per year, and with just 12 employees, including the office staff. It wasn't unusual for everyone to have to pitch in and work weekends too. The hard work paid off, and in 1919 the company could afford a larger factory with its own foundry. Around this time it also regularly took on smaller side jobs for the A.O. Smith Corporation and a local auto parts supplier.

The Roaring Twenties started out exceptionally gloriously for Badger Meter. Everything was geared toward growth; sales representatives were sent to Chicago, Kansas City, Brooklyn, Denver and Portland, and many municipalities were upgrading their waterworks. With the city of Chicago, for example, the company negotiated a major contract for a whopping 400 water meters per day. Buoyed by orders like these, it paid out a 300-percent dividend to its shareholders in 1929. It should come as no surprise to anyone that the Great Depression threw a huge wrench in the company's plans. It had to lay off employees en masse, cut hourly wages, lower its prices and suspend the dividend. Fortunately, in 1933, shortly before bankruptcy, Badger Meter was rescued by a large order from Mexico City for 30,000 water meters. The situation steadily improved, the company was able to keep growing and over the years kept bringing innovative new products to market. Today, Badger Meter Inc. is one of the leading global providers of water solutions that cover flow measurement, quality control and other system parameters. It also provides its customers with valuable data and analytics, which are essential for the sustainable use of water.

What does the future hold for Badger Meter?

Before I get to this question, I'd like to briefly sum up Badger Meter's business model once more. The company is the leading global provider of innovative, accurate and durable flow solutions for water and other liquids. To monitor water quality, it uses optical and electrochemical measuring devices that deliver real-time and on-demand data parameters. Badger Meter divides its business into two segments:

1. Sale of water meters, radios and water quality monitoring technologies to water utilities
2. Sale of meters and other measuring instruments, valves and other products for industrial applications

Its customers include companies from the automotive, construction, building services, aerospace, oil & gas, testing technology and chemical industries, among others. By its own estimates, about 90 percent of its products are used in water-related applications. Generally speaking, anything that flows through a pipe or a line, Badger Meter can measure, control and analyze accordingly. It currently employs around 1,600 people who work at production sites and facilities in the USA, Mexico, England, the United Arab Emirates, Singapore, Sweden, the Czech Republic, Austria, Switzerland and Germany.

Now let's take a look at the most recently published figures for the first quarter of 2021 (ended March 31, 2021). Total revenue for this period was 117.8 million US dollars, an increase of 9 percent over the prior-year quarter. Earnings per share, at 0.47 US dollars, were also significantly higher than the year before. Here the company achieved an impressive increase of 15 percent. In addition, Badger Meter announced that it wants to expand its expertise in water quality measurement with the acquisition of Analytical Technology Inc. The Pennsylvania-based company specializes in water quality monitoring solutions and also offers technologies for detecting toxic gases in various applications. Although Badger Meter also had to accept revenue losses in 2020 in the wake of the coronavirus pandemic, since many municipalities and industrial companies put investments on hold for the time being, it was nevertheless able to report record orders at the end of the current quarter.

We may live on the blue planet, but in the future we'll have to be much more economical with our drinking water. There are about 1.4 billion cubic kilometers of water on Earth, but only 2.5 percent of it is fresh water. Of that, in turn, 2/3 is locked up in glaciers and ice. Another 30 percent is groundwater below the surface. Only about 0.3 of the freshwater supply, or 0.008 percent of all water, is relatively easily accessible to us humans. On top of that, due to climate change, severe heat waves and droughts are no longer a rarity in Europe either.

Long story short: water is extremely precious and we should do everything we can to handle it more mindfully. Badger Meter offers products here that, according to the company, can save more than 18.9 billion liters of water every year. All in all, I have to admit that I'm very optimistic about Badger Meter's future.

And what about the dividend?

As already mentioned in the company history, Badger Meter shareholders received their first share of the company's profits in 1929. Due to financial difficulties at the time, the dividend had to be suspended for a while back then. Since 1984, however, the company has managed to pay a dividend every quarter, but it wasn't until 1992 that it established annual dividend increases. Looking at the last 10 years, the dividend growth rate is 9.7 percent - over 5 years even 12.5 percent. The current dividend yield of 0.8 percent is fairly low, but the payout ratio of 41 percent still signals quite a bit of room for the future.

Conclusion:
Over the years, Badger Meter has worked its way to a leading market position with innovative flow measurement technologies. I'm confident that the business can keep growing in the future, which is why I'll be adding a few shares of the company to my own portfolio at the next opportunity.