Water Utility Is Pouring It On

We're barreling toward the end of my World MoneyShow trifecta comments. Over the last two days, I've shared my stock picks for the show as well as insights from the Procter & Gamble (PG) and General Electric (GE) panel that I hosted at the show. The second panel featured American Water Works (AWK), a company I have known for some time. We own it in The Thematic Growth Portfolio that I manage and it's been a strong performer, up some 35% including dividends, in my Growth & Dividend Report newsletter. By comparison, Alexandria Real Estate Equities (ARE), both the company and the shares, were new to me. Rounding out the panel was Brazilian electric power company Companhia Energetica de Minas Gerais (CIG), which has seen its shares get cut in half over the last six months despite the near 19% dividend yield. With that out of the way, let's get to the meat... Shares of American Water Works have rallied hard over the last five years, reflecting the company's position as the largest publicly traded water utility that's benefiting from drought conditions, as well as the low-interest-rate environment, as it has grown its quarterly dividend since going public. What became evident during the panel was the consolidation opportunity ahead of American Water Works, given that it represents only 16% of the overall industry across 16 states. Aiding the company in its bid to strategically grow its footprint is the daunting task ahead of the industry, which has to invest $1 trillion over the next 20 years. The most recent grade on U.S. water infrastructure from the American Society of Civil Engineers was a D-. Several financial targets were also shared during the conversation, including growing earnings 7% to 10% over the next several years as well as raising the dividend payout to 60% from the current 50% over time. There are numerous strategies employed at real estate investment trusts (REITs), but I have to say I really like that of Alexandria Real Estate Equities, which focuses on facilities and campuses to the life-science and technology industries. Today that mix is 90%/10%, but with companies like Apple (AAPL), Facebook (FB), Google (GOOGL), Uber and others expanding their respective workforces, the outlook for ARE is bright and the mix could reach 60%/40% in the coming years. The average lease period is nine years, with more than half from investment-grade tenants. Over the last few months, ARE shares have soared from $73 to $97, but they've dipped over the last few days amid renewed Federal Reserve interest rate hike chatter. To his credit, Alexandria CEO Joel Marcus pointed out that potential shareholders should be mindful of the relationship between higher dividend paying stocks, like REITs and utilities, when interest rates move higher. This is one stock I'll be keeping my eye on, with the goal of making it a position at the right time. Turning to Companhia Energetica de Minas Gerais, I mentioned the high dividend yield, but the truth of the matter is it reflects the sharp drop in the shares over the last six months as severe drought has battered the region and CIG's business. The company cautioned that even though Brazil is entering the rainy season, current forecasts are not likely to hold off water rationing. We'll need to revisit the company and its shares when the Brazilian economy and its water situation improves, but until then this is one to steer clear of.

Water Utility Is Pouring It On

Going for growth amid industry challenge.

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