Dividend Kings in Focus: Middlesex Water Firm

Up to date on November 4th, 2024 by Aristofanis Papadatos

The Dividend Kings are an illustrious group of firms. These firms stand aside from the overwhelming majority of the market as they’ve raised dividends for at the very least 50 consecutive years.

We imagine that traders ought to view the Dividend Kings as probably the most high-quality dividend development shares to purchase for the long run.

With this in thoughts, we created a full listing of all of the Dividend Kings.

You possibly can obtain the complete listing, together with essential monetary metrics reminiscent of dividend yields and price-to-earnings ratios, by clicking the hyperlink beneath:

This group is so unique that there are simply 53 firms that qualify as a Dividend King. One of many constituents of the Dividend Kings listing is Middlesex Water Firm (MSEX), a water utility firm that has been in enterprise for over 125 years.

This text will talk about the corporate’s enterprise overview, development prospects, aggressive benefits, and anticipated returns.

Enterprise Overview

Middlesex Water Firm was fashioned in 1897, making the corporate one of many oldest water and wastewater utility names within the U.S. The corporate has operations primarily in New Jersey, and annual income of roughly $180 million.

Like lots of its friends, Middlesex is primarily centered on the regulated portion of its enterprise.

Supply: Investor Presentation

Middlesex gives primary water-related providers to prospects, reminiscent of promoting, distributing, gathering, and treating water. The non-regulated enterprise consists of service contracts that embody the operation and upkeep of municipal personal water and wastewater methods in New Jersey and Delaware.

The overwhelming majority of income comes from the regulated aspect. One among its largest service areas consists of Middlesex County, the place the corporate gives water providers to over 61,000 retail prospects. This enterprise contributed ~60% of income final yr.

Middlesex reported third-quarter earnings in late October. Income grew 18% over the prior yr’s quarter and earnings per share grew 43%, from $0.56 to $0.80, exceeding the analysts’ estimates by $0.12.

The sturdy efficiency resulted from the New Jersey Board of Public Utilities (NJBPU)-approved base charge enhance efficient March 1, 2024, and elevated buyer demand. Within the Delaware System, income development resulted from buyer development and elevated buyer demand.

The same development was evident for the 9 months ending September 30, 2024. Earnings per share grew 38%, from $1.44 to $1.98, primarily because of the aforementioned charge hike and powerful buyer demand.

Development Prospects

Utility firms are sometimes categorised as gradual, however regular growers. This doesn’t essentially apply to Middlesex, nonetheless, as the corporate had an earnings-per-share compound annual development charge of 10% for the 2012 to 2021 time interval. It is a sturdy development charge for a enterprise that’s principally regulated. It needs to be famous that development for the corporate hasn’t at all times been in a straight line up over the long-term.

Because the majority of income comes from regulated enterprise, Middlesex is on the mercy of the approval of charge will increase to develop.

Thankfully, the corporate closely invests in its infrastructure with the intention to justify buyer charge will increase. For instance, the New Jersey Board of Public Utilities accepted a 40% enhance in Middlesex’s charges in one of many firm’s largest service areas for 2022. This wasn’t only a one-time elevate, because the approval board has at all times accepted the corporate’s request to lift charges.

It’s doubtless that charge will increase will proceed to be a significant factor for the corporate as Middlesex continues to make heavy investments into ageing water infrastructure. This won’t solely enhance the standard of operations, but in addition result in charge hikes being accepted.

Notably, Middlesex has loved approximate common annual development of 15% in its charges during the last 4 years.

Supply: Investor Presentation

Subsequently, it is just pure to anticipate charge hikes to comprise a serious development driver for the utility within the upcoming years.

Along with charge will increase, Middlesex can develop by including new prospects whereas additionally holding present prospects.

For instance, final yr, Middlesex accomplished a new settlement to proceed to handle water and sewer utility operations with the Borough of Avalon, New Jersey. The brand new 10-year settlement takes the place of the prior contract. The brand new contract gives for upkeep of operations and buyer providers.

The non-regulated enterprise might be a serious supply of development as effectively. In 2013, Middlesex was awarded a $32 million contract to assemble and preserve the water distribution community for the Dover Air Power Base in Delaware. This contract will present many years of recurring income, because the contract is for 50 years.

We anticipate MSEX to develop its earnings-per-share by roughly 4.7% per yr on common over the subsequent 5 years.

Aggressive Benefits & Recession Efficiency

Utility firms usually profit from a number of benefits. The primary is that they often function in a near-monopoly on the areas that they service.

Within the case of water utilities, Middlesex and its friends present probably the most primary staple of all, water. Prospects are going to want the providers that the corporate provides whatever the energy of the economic system.

Middlesex additionally advantages from its diversified enterprise.

Supply: Investor Presentation

Middlesex receives barely greater than 50% of its income from residential prospects, however there are different classes, reminiscent of industrial, contract gross sales, and fireplace safety, that contribute meaningfully to the corporate’s enterprise.

Given these built-in benefits, many utilities usually outperform different sectors of the market throughout recessions. Beneath are Middlesex’s earnings-per-share outcomes earlier than, throughout, and after the Nice Recession:

2006 earnings-per-share: $0.82
2007 earnings-per-share: $0.87 (6.1% enhance)
2008 earnings-per-share: $0.89 (2.3% enhance)
2009 earnings-per-share: $0.72 (19.1% lower)
2010 earnings-per-share: $0.96 (33.3% enhance)

Middlesex’s earnings-per-share initially grew throughout the recessionary interval earlier than falling by a excessive double-digit quantity in 2009, displaying that the utility wasn’t fully proof against the financial backdrop of the interval. One constructive was that income stayed comparatively flat for the 2008 to 2009 interval.

Importantly, the corporate rebounded in a considerable method the very subsequent yr and set a brand new excessive for earnings-per-share. Development has principally been in an uptrend since.

Valuation & Anticipated Whole Returns

Middlesex gained entrance into the Dividend Kings following the corporate’s dividend enhance announcement on October twenty first, 2022. The corporate lately raised its dividend by 5% and has now raised its dividend for 52 consecutive years. Middlesex at the moment yields 2.1%. The corporate has paid a steady dividend since 1912.

As beforehand talked about, we anticipate 4.7% EPS development per yr on common over the subsequent 5 years.

Lastly, the final element of complete returns will probably be valuation. Shares are at the moment buying and selling at 28.9 instances our earnings-per-share projection for the yr.

Given the corporate’s tailwinds and enterprise mannequin, we imagine honest worth is 25 instances earnings, which is in keeping with the typical valuation of the inventory for the final decade. Reverting to our goal valuation by 2029 would lead to a a number of contraction decreasing annual returns by 2.9%.

Subsequently, Middlesex is forecasted to return 3.7% per yr on common by means of 2029.

Remaining Ideas

There may be a lot to love about Middlesex, particularly its monopoly standing, the excessive success of charge enhance approvals, and the lengthy historical past of dividend development. Solely probably the most well-run companies will pay dividends for so long as Middlesex has.

That mentioned, the inventory is buying and selling at a premium to its common historic valuation since 2014. Regardless of the attractiveness of the corporate and its dividend development streak, we imagine traders are higher off elsewhere as forecasted returns over the medium time period are very weak.