Tradition of water utility dividend increases expected to keep flowing

In 2021, water utilities averaged an annual dividend increase of 6.7%, in line with the group's average increase in 2019 and 2020.

Looking ahead, the water utility sector appears well-positioned to continue this tradition of mid-single-digit annual dividend increases. Water infrastructure across the country continues to deteriorate and these companies are expanding their capital budgets to make these investments, while expanding their footprint acquiring additional water systems. Forecast earnings growth for the largest five water utilities is in the mid-to-high single-digit range and payout ratios are expected to remain in the 50% to 60% range.

Analysts anticipate dividend increases of 6.25% to 9.58% for the five largest water utilities during 2022, based on S&P Global Market Intelligence consensus estimates. These five companies increased dividends an average of 7.8% in 2021. With lower earnings growth rates, the smaller water utilities have raised their dividend at a slower rate than their multi-state peers.

Historically, San Jose, Calif.-based California Water Service Group and SJW Group announce their annual dividend increases at the end of January, so investors may get a glimpse into 2022 trends in the coming days.

Water utility dividend payout ratios have steadily declined from about 70% in 2011 to between 55% to 57% in recent years. With earnings growth forecasts outpacing dividend growth targets, payout ratios are likely to remain below 60% across the group, with plenty of room for continued dividend increases.

A look at 2021 water dividend increases

Dividend expansion for water utilities has remained an important element of many companies' strategies to attract shareholder interest. All eight water utilities have increased their dividend payments annually since 2008, when American Water Works Co. Inc. had its IPO. Excluding American Water, the remaining seven water utilities have increased their dividend payments annually for at least 25 years, with American States Water Co. having increased the dividends each calendar year for 66 consecutive years.

With a 9.0% dividend growth in 2021, American Water, the largest investor-owned water utility, posted the largest increase across the group, slightly below the company's 10-year dividend CAGR of 10.1%. Management continues to express confidence in the company’s ability to increase the dividend at the high end of its 7% to 10% range over the next few years.

At the other end of the spectrum, Artesian Resources Corp., the smallest investor-owned water utility monitored by Regulatory Research Associates, a group within S&P Global Market Intelligence, announced two small 1.5% dividend increases in 2021. The company has been announcing modest biannual dividend increases since 2010, breaking that streak in 2020 with a single 3% divided increase late in the year.

^{Regulatory Research Associates is a group within S&P Global Market Intelligence.}

^{This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.}