Dividend Kings in Focus: Middlesex Water Company

Up to date on November twenty fourth, 2023

The Dividend Kings are an illustrious group of corporations. These corporations stand aside from the overwhelming majority of the market as they’ve raised dividends for no less than 50 consecutive years.

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

With this in thoughts, we created a full checklist of all of the Dividend Kings. You may obtain the complete checklist, together with necessary monetary metrics similar to dividend yields and price-to-earnings ratios, by clicking the hyperlink under:

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

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

Enterprise Overview

Middlesex Water Firm was shaped 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 $160 million.

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

Supply: Investor Presentation

Middlesex’s supplies fundamental water-related companies to clients, similar to promoting, distributing, amassing, and treating water. The non-regulated enterprise consists of service contracts that embody the operation and upkeep of municipal non-public water and wastewater techniques in New Jersey and Delaware.

The overwhelming majority of income comes from the regulated facet. Certainly one of its largest service areas consists of Middlesex County, the place the corporate supplies water companies to over 61,000 retail clients. This enterprise contributed ~60% of income final yr.

Middlesex most not too long ago reported third-quarter earnings in November. Income decreased by $1.0 million to $46.7 million in comparison with the identical interval in 2022. This decline was primarily on account of decrease buyer demand in each their Middlesex and Delaware techniques, partially offset by a rise in clients and a charge improve authorised by the New Jersey Board of Public Utilities.

MSEX’s internet earnings for the quarter decreased by $4.3 million in comparison with 2022, with diluted earnings per share at $0.56, down from $0.80 in 2022.

For the 9 months ending September 30, 2023, revenues elevated by $4.1 million to $127.7 million in comparison with the identical interval in 2022. This improve was largely because of the closing section of the NJBPU-approved base charge improve, offset by decreased revenues within the Delaware System and decrease new connection charges.

The web earnings for the nine-month interval decreased by $9.5 million in comparison with 2022, with diluted earnings per share dropping to $1.44 from $1.99 within the earlier yr.

Progress Prospects

Utility corporations are sometimes categorized as sluggish, however regular growers. This doesn’t essentially apply to Middlesex, nevertheless, 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 largely regulated. It must 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 so as to justify buyer charge will increase. For instance, the New Jersey Board of Public Utilities authorised a 40% improve in Middlesex’s charges in one of many firm’s largest service areas for 2022. This wasn’t only a one-time elevate both, because the approval board has at all times authorised the corporate’s request to lift charges.

It’s seemingly that charge will increase will proceed to be a significant component for the corporate as Middlesex continues to make heavy investments into getting old water infrastructure. This won’t solely enhance the standard of operations, but additionally result in charge hikes being authorised.

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

For instance, Middlesex accomplished a brand 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 supplies for upkeep of operations and buyer companies.

The non-regulated enterprise may very well be a significant 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 Pressure Base in Delaware. This contract will present a long time of recurring income, because the contract is for 50 years.

We anticipate MSEX will generate 6% earnings-per-share development over the following 5 years.

Aggressive Benefits & Recession Efficiency

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

Within the case of water utilities, Middlesex and its friends supplies essentially the most fundamental staple of all, water. Clients are going to wish the companies that the corporate gives whatever the energy of the financial system. Water payments are additionally usually low in comparison with different utility payments.

Middlesex additionally advantages from its diversified enterprise.

Supply: Investor Presentation

Middlesex receives barely greater than 50% of its income from residential clients, however there are different classes, similar to 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% improve)
2008 earnings-per-share: $0.89 (2.3% improve)
2009 earnings-per-share: $0.72 (19.1% lower)
2010 earnings-per-share: $0.96 (33.3% improve)

Middlesex’s earnings-per-share initially grew in the course of the recessionary interval earlier than falling by a excessive double-digit quantity in 2009, exhibiting that the utility wasn’t utterly resistant to 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 means the very subsequent yr and set a brand new excessive for earnings-per-share. Progress has largely been in an uptrend since.

Valuation & Anticipated Complete Returns

Middlesex gained entrance into the Dividend Kings following the corporate’s dividend improve announcement on October twenty first, 2022. MSEX at the moment yields 2%. The corporate has paid a steady dividend since 1912.

As beforehand talked about, we anticipate 6% EPS development yearly over the following 5 years.

Lastly, the final part of whole returns can be valuation. Shares are at the moment buying and selling at 32.4 occasions our earnings-per-share projection for the yr.

Given the corporate’s tailwinds and enterprise mannequin, we consider honest worth is 30 occasions earnings, which is the common valuation of the inventory for the final 5 years. Reverting to our goal valuation by 2028 would end in a a number of contraction lowering annual returns by 1.5%.

Subsequently, Middlesex is forecasted to return 5.4% yearly via 2028.

Remaining Ideas

There’s a lot to love about Middlesex, particularly its monopoly standing, the excessive success of charge improve approvals, and the lengthy historical past of dividend development. Solely essentially 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 even its personal lofty valuation common since 2017. Regardless of the attractiveness of the corporate and its dividend development streak, we consider traders are higher off elsewhere as forecasted returns over the medium time period are very weak.

The next articles include shares with very lengthy dividend or company histories, ripe for choice for dividend development traders: