Analysts anticipate dividend increases of 5.3% to 10.4% for the four largest water utilities during 2020, based on S&P Global Market Intelligence consensus estimates. With an average 2020 expected payout ratio of 56.2% (for those companies with an estimated 2020 dividend), the water utility sector appears well-positioned to continue its tradition of robust annual dividend increases. Water infrastructure across the country continues to deteriorate and these companies are expanding their capital investment programs, while widening their geographic footprint through acquisitions.
On Jan. 29, California Water Service Group announced a quarterly dividend of 21.25 cents, payable Feb 21. This 7.6% dividend increase is well-above the company's five-year compound annual dividend growth rate of 4.0% and above the projected consensus 2020 dividend increase of 5.3%. Analysts anticipate 2020 earnings growth for Cal Water of over 14%, driven by a rate case pending at the company's largest subsidiary California Water Service Co. The company filed a settlement with the California Public Utilities Commission in October 2019 and had expected a decision in December. In California, rate increases are typically implemented retroactively, so the company would recognize the rate increase effective Jan. 1, 2020, once a final decision is authorized.
Not to be outdone by its neighbor, SJW Group, which is also San Jose based, announced a 6.7% dividend increase the following day, inline with analyst expectations, marking the company's 52nd consecutive annual dividend increase. In October 2019, the company completed the acquisition of Connecticut Water Service Inc. SJW has stated its intention to continue increasing the dividend annually while keeping the dividend payout ratio between 50% and 60%.
Investors expect Aqua America Inc., soon to be known as Essential Utilities Inc., to formalize its long-term earnings and dividend growth strategy at the company's upcoming Feb. 27 analyst day. Analysts currently forecast 2020 EPS growth of 7.5% and dividend growth of 8.9%. Aqua recently completed the acquisition of Peoples Natural Gas Company LLC after the Jan. 16 approval by the Pennsylvania Public Utility Commission. The name change is expected to take effect Feb 3.
A look at 2019 dividend increases
In 2019, the eight investor-owned water utilities raised their dividend an average of 6.5%. This is below the 8.2% group average increase in 2018, which included a 28.7% dividend increase by SJW Group, but remains above the average dividend increases posted by electric, natural gas, and the multi-utility sub-sectors, as shown by the adjacent table.
Dividend growth rates across the water sector, have been quite diverse, as seen in the table below.
With 9.8% dividend growth in 2019, American Water Works Co. Inc., the largest investor-owned water utility, posted the largest increase across the group. The company also boasts the largest 10-year CAGR within the group at 9.1%. At its December 2019 investor day, management expressed confidence in future dividend increases at the high end of its 7% to 10% range.
At the other end of the spectrum, Artesian Resources Corp. has increased its dividend twice each year starting in 2010, averaging a 3% increase since 2014.
Dividends shown are based upon the dividends paid during the year. Multiple increases within the same year are counted as only one dividend rate change for that period.
The small water utility sector has a proud history of continuous dividend payments dating back decades. These eight utilities, and the many water utilities that have been acquired over the years, have been not only be consistent dividend payers, but also reliable sources of modest, dividend growth, favored by its strong retail shareholder base. All eight water utilities have increased their dividend payments annually since 2008, when American Water had its initial public offering. Excluding American Water, the remaining eight water utilities have increased their dividend payments annually for over 20 years.
Dividend payout ratio
Water utility dividend payout ratios have steadily declined from about 75% in 2006 to below 60% in 2015 and 2016. During the same period, the electric utility payout ratio has fluctuated around 60%, aside from a spike during the 2008 financial crisis. Gas utilities slipped to a 53% payout ratio in 2008, but have since increased to roughly 60%, in line with electrics. In general, water utilities have room to grow their payout ratios to support dividend increases and still maintain parity with the overall utility industry.
For details on 2019 dividend increases and payout ratio trends across the RRA-covered publicly traded energy and water utility universe, refer to RRA Financial Focus Utility Dividends: 2019 Review and Outlook.
Regulatory Research Associates is a group within S&P Global Market Intelligence.
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