Dividend Kings In Focus: SJW Group

Up to date on October thirty first, 2024 by Aristofanis Papadatos

Corporations which have not less than 50 years of dividend development are thought of Dividend Kings. These shares are a number of the most generally owned and adopted shares amongst revenue traders.

You possibly can see the complete checklist of all 53 Dividend Kings right here.

You can even obtain an Excel spreadsheet with the complete checklist of Dividend Kings (plus essential metrics reminiscent of price-to-earnings ratios and dividend yields) by clicking on the hyperlink beneath:

You is likely to be stunned to seek out that there are some small cap names which have additionally raised their dividend for not less than the previous 50+ years. One such firm is SJW Group (SJW), a ‘water inventory‘ utility firm.

This text will study SJW’s enterprise, development prospects, and valuation with a purpose to decide if shares are price buying now.

Enterprise Overview

SJW was based in 1866 and was initially often called the San Jose Water Firm. With a market cap of $1.9 billion, SJW is without doubt one of the smallest Dividend Kings.

SJW is a water utility firm that purchases, shops, purifies, and distributes water to customers and companies.

Supply: Investor Presentation

Following the finished merger with Connecticut Water Service (CTWS), SJW at present consists of 5 subsidiaries:

San Jose Water
Connecticut Water
Maine Water
SJWTX
SJW Land Firm

San Jose Water Firm, a regulated utility, has almost 230,000 connections and gives water to roughly a million well-educated and prosperous prospects within the Silicon Valley space. The acquisition of CTWS added 138,000 connections and 450,000 prospects in Connecticut and Maine.

SJWTX is a regulated water utility firm that has 25,000 connections within the space between San Antonio and Austin, Texas. Water utilities provide nearly all revenues for SJW, however there’s a actual property portion of the corporate as effectively.

SJW Land owns and develops properties for each residential and warehouse prospects in California and Tennessee. SJW makes use of the rental revenue from these properties to reinvest in its water utility enterprise.

Progress Prospects

On October twenty eighth, 2024, SJW Group reported third quarter outcomes for the interval ending June thirtieth, 2024. Income grew 10% to $225.1 million, beating the analysts’ estimates by $11.6 million.

Earnings-per-share grew 4%, from $1.13 to $1.18, beating the analysts’ consensus by $0.04. The utility has missed the analysts’ earnings-per-share estimates solely as soon as within the final 9 quarters.

As in current quarters, the advance in income resulted primarily from SJW Group’s California and Connecticut companies, which benefited from increased water charges, whereas development in prospects aided the Texas enterprise.

Increased charges total added $40 million to outcomes for the quarter, increased buyer utilization added $4.8 million, and development in prospects contributed $2.4 million.

Supply: Investor Presentation

Previous to the merger, California contributed 92% of SJW’s revenue. In the newest quarter, nevertheless, this determine was right down to 57%. Connecticut is the second-largest supply of revenue at 34%, with the remaining states of Texas, Tennessee, and Maine making up the remainder.

SJW nonetheless depends on simply two states for the overwhelming majority of its revenue however is barely much less top-heavy than earlier than the merger. The mixture of SJW and CTWS has made the mixed firm the third-largest investor-owned water utility firm by way of each enterprise worth and price base.

The mixed entity has almost 406,000 service connections and gives companies to 1.5 million individuals.

SJW has compounded its earnings per share at a median annual price of solely 0.6% during the last decade but it surely has grown its earnings per share by 15% per 12 months on common during the last 5 years. The spectacular efficiency within the final 5 years has resulted primarily from the merger with CTWS in 2018.

CTWS was no slouch both when it got here to earnings development, as the corporate has compounded earnings-per-share by 6.7% yearly within the decade main as much as the merger.

We count on that the mixed firm will be capable of generate earnings development of 8.0% per 12 months on common by 2029.

Aggressive Benefits & Recession Efficiency

As a regulated utility, SJW is restricted in how a lot it will probably elevate charges for patrons. Happily for the corporate, they function in areas, i.e., Silicon Valley and Central Texas, which have seen excessive inhabitants development charges.

As these populations develop, they want dependable entry to water. To encourage SJW to spend on enhancing the water infrastructure in these areas, native governments permit the corporate to lift charges at pretty excessive ranges.

For instance, San Jose Water obtained approval for a price improve of 9.8%, 3.7%, and 5.2% for 2019, 2020, and 2021, respectively. Giant price will increase ought to stream proper to the corporate’s backside line.

One other benefit for SJW was tax reform laws that went into impact in 2018. Tax reform truly lowered SJW’s tax price from 37% in 2017 to twenty% in 2018. The impression of tax reform will proceed going ahead.

Within the first half of 2023, the corporate truly posted a unfavorable efficient tax price of 9% because of the partial launch of unsure tax place reserve.

Nevertheless, even within the prior interval, when no such one-off circumstance befell, the corporate paid a 17% consolidated revenue tax price. Furthermore, within the final 12 months, SJW has reported a ten% revenue tax price.

Between a decrease tax price and the extra revenue from the merger with CTWS, SJW has a chance to supply sturdy dividend development going ahead.

SJW has paid an uninterrupted dividend for the previous 80 years. The corporate has raised its dividend for the previous 56 years. The common elevate within the decade earlier than the merger was 4.8%.

In recent times, the corporate rewarded shareholders with a 7.1% improve in 2019, a 6.7% elevate in 2020, a 6.3% improve in 2021, a 5.9% elevate in 2022, a 5.6% elevate in 2023 and a 5.3% elevate in 2024. Shares of SJW yield 2.9% for the time being.

Supply: Investor Presentation

Whereas future development appears to be like enticing due to the corporate’s merger with CTWS, it is usually essential to look at how an organization carried out throughout robust financial instances. SJW’s earnings-per-share through the Nice Recession are beneath:

2007 earnings-per-share: $1.04 (12.6% decline)
2008 earnings-per-share: $1.08 (4% improve)
2009 earnings-per-share: $0.81 (25% decline)
2010 earnings-per-share: $0.84 (4% improve)

SJW was not resistant to the final recession as earnings-per-share declined 22% from 2007 by 2009. Whereas earnings development did return within the subsequent 12 months, it took the corporate till 2014 to high its pre-recession excessive.

Water stays an important useful resource for customers even throughout a recession, however SJW’s efficiency throughout and after the final monetary disaster reveals that development might be elusive. That mentioned, the corporate’s extra diversified enterprise mannequin right now makes it doubtless that the subsequent recession received’t be as extreme for SJW.

Valuation & Anticipated Returns

SJW reaffirmed its steering for 2024 and expects earnings per share of $2.68 to $2.78 for the complete fiscal 12 months. Utilizing the present share value of $56 and the midpoint of anticipated earnings per share for the 12 months, the inventory has a price-to-earnings ratio of 20.5.

This compares favorably to our goal price-to-earnings ratio of 26, which is a premium to the inventory’s pre-merger 10-year common a number of. If the inventory trades at our goal valuation stage by 2029, it should get pleasure from a 4.9% annualized valuation tailwind in its returns.

Going ahead, traders can count on whole returns to be the next:

0% earnings per share development
9% a number of enlargement
9% dividend yield

In whole, we count on shares of SJW to supply a median annual return of 15.2% over the subsequent 5 years.

Last Ideas

SJW’s merger with CTWS has helped diversify the corporate’s enterprise mannequin, making the mixed entity much less reliant on California for revenue. SJW continues to be top-heavy, with simply two states contributing over 85% of revenue, however that is an enchancment over every particular person firm previous to the merger.

SJW additionally has a really lengthy historical past of dividend development and is one among simply 53 firms with not less than 5 a long time of dividend development. That is a formidable accomplishment.

With a formidable observe document of dividend development and SJW’s projected to attain double-digit returns over the medium time period, we assign the inventory a purchase ranking.