California Water Service Group: Buy It And Let It Drip

Core Viewpoint - California Water Service is positioned as a long-term buy for dividend growth investors due to recent positive financial results, regulatory approvals, and a low valuation compared to historical levels [1][15]. Company Overview - California Water Service Group, established in 1926, is the third largest publicly traded water and wastewater utility in the U.S., operating in five states and serving over two million people [2]. - The company reported total revenue of over $794.6 million in 2023 and$984.5 million in the last twelve months [2]. Revenue and Earnings Growth - In Q2 2024, the company reported a 26% increase in operating revenue, with diluted EPS rising approximately 311% due to regulatory approval and lower expenses [3]. - The share price has increased by about 6.0% in 2024 and 11.2% over the last twelve months [3]. Financial Performance - Q2 2024 financials showed operating revenue of $515.0 million, a 58.4$325.1 million in YTD 2023, while operating expenses rose by 19.1% [4]. - Net income attributable to California Water Service was $110.5 million, a significant recovery from a loss of$12.7 million in the previous year [4]. Growth Drivers - Revenue growth has averaged about 3% annually over the past five and ten years, driven by acquisitions and periodic rate cases [5]. - The company plans to invest $1.6 billion in infrastructure from 2025 to 2027, with requested revenue increases of$140.6 million (17.1%) for 2026, $74.2 million (7.7$83.6 million (8.1%) for 2028 [8][9]. Competitive Advantages - California Water Service operates as a regulated monopoly, providing a stable demand for freshwater and wastewater treatment insulated from economic cycles [10]. Dividend Analysis - The company has a 57-year streak of dividend increases, with a forward yield of approximately 2.04%, above its five-year average of 1.79% [11][12]. - The forward payout ratio is around 38%, indicating strong dividend safety supported by operating cash flow [13]. Valuation - The current share price of approximately $54.98 suggests the stock is slightly undervalued compared to a fair value estimate of$58.80 based on a P/E ratio of 20 [14]. - Sensitivity calculations indicate a fair value range from $55.86 to$61.74, with the stock price at 89% to 98% of the fair value estimate [14]. Final Thoughts - Water utilities like California Water Service are considered excellent long-term investments, providing value and growing dividends, with the company being slightly undervalued based on historical metrics [15].