Should You Buy This 66 Year Dividend King?

With new cases of the coronavirus spiking in the US and worldwide.

With the already historic unemployment levels and job losses in recent months.

With massive uncertainty in hospitals, banks, and other industries.

And with many Blue Chip stocks looking vulnerable when they’re supposed to be among the best areas to invest your capital.

There are few safe places to invest your today.  And this number grows smaller every day this crisis lasts.

The key to continue compounding your investments and build wealth is to keep investing well over time.

Most people think the number one way to do that is to invest in assets that will grow your capital.

And this is a huge part of things.

But another huge part of this is also losing as little capital as possible.

The fewer investment losses you have the more capital you keep.  And the more capital you keep the faster you can invest well to grow your wealth.

In recent articles I’ve shown you several stocks to avoid investing in…

Today, I want to answer the question – Should You Buy This 66 Year Dividend King

American States Water Company (AWK) is a water utility in California.

Its paid and increased its dividend for 66 consecutive years making it the longest reigning Dividend King in the world.

It’s based in San Dimas California.  It has a $2.8 billion market cap. And it pays a 1.8% dividend… Which is reason #1 to consider buying its stock.

American States Water’s 1.8% Dividend

Over the last decade AWK’s paid out a total of $8.29 per share in dividends.

At today’s share count of 37 million shares that’s equal to $306.7 million paid out to shareholders in that time.

It also grew its dividend 140% from $0.52 per share in 2010 to $1.25 per share now.  This is an annual dividend growth rate on average of 14% per year.

These dividend payments will help you in normal times earn cash if you take the money out.  Or allow you to buy more shares over time if you reinvest the dividends.

These regular payments will help you earn more money for your retirement.  And the solid, stable, and growing dividends will help in any kind of prolonged economic issues like we’re dealing with today.

It can do this because it earns solid profits.  Which is reason #2 to buy American States Water to Depression Proof Your Portfolio.

American States Water Earns Large But Inconsistent Profits

Over the last decade it earned an average operating income margin of 24.5% per year.

I look for anything above 10%. 

Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its 2.5% per year on average.  With some years being negative but most being positive.

I call this the “Cash Machine” metric.

I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above.  If a company surpasses both thresholds it makes it a great operating business that is safe and potentially valuable.

American States Water surpasses one of my thresholds here but not the other.

Not a deal killer yet but let’s keep moving to see if we should still consider buying its stock or not.

American States Water Has Reasonable Debt

As of this writing American States has $10 million in cash compared to $540 million in debt.

As a percentage of its balance sheet total liabilities make up 63.3%.

And its debt to equity ratio is 0.86.

Another mixed bag here with some meeting my threshold while others don’t.

For example, the debt to equity below 1 is fine… That’s what I look for.  But the low levels of cash compared to relatively elevated levels of debt concern me.

However, even if people stop paying some of their bills due to the coronavirus, they aren’t likely to stop paying their water bills.

Does this mixed bag give me some pause?  Yes.  But it’s not a deal breaker like some other stocks I’ve shown you.

But what about its valuation?  Is it cheap? 

American States Water IS NOT Cheap

With the markets at or near all-time highs you’d expect a Dividend King like American States Water to be selling at an enormous valuation.

And it is.

As of this writing its P/E is 33.7.

Its P/CF is 23.2.

Its forward P/E is 31.8.

And its enterprise value to operating income – EV/EBIT is 25.3

On all three metrics at the top I look to buy investments below 20 to consider them undervalued.

And on EV/EBIT I look to buy stocks below 8.

This means, American States Water is overvalued by a large amount right now.

And this means owning its stock gives you no margin of safety in investing terminology.

When you invest in stocks that have a margin of safety it makes the investment safer.  And it also means you should expect to earn higher returns owning in the coming years.

The inverse of this is also true…

When you invest in a stock without a margin of safety it makes the investment riskier.  And it also means you should expect to earn less owning its stock going forward.

With American States Water being overvalued it makes the investment riskier.  Especially when you consider the mixed bag from its profits and debt issues as well.

Conclusion

If you’re looking for a solid, safe, stable, and enormously profitable investment to buy to Depression Proof Your Portfolio – avoid the 66-year Dividend King American States Water.  And consider investing in some of the other stocks below I’ve already shown you.

Click here to see some of the stocks we recommend to Depression Proof Your Portfolio.

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

1 Shares:
You May Also Like