Dividend Kings in Focus: Middlesex Water Company

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

The Dividend Kings are an illustrious group of firms. These firms stand other than the overwhelming majority of the market as they’ve raised dividends for a minimum of 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 necessary monetary metrics resembling dividend yields and price-to-earnings ratios, by clicking the hyperlink under:

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 focus on 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 a lot of its friends, Middlesex is primarily targeted on the regulated portion of its enterprise.

Supply: Investor Presentation

Middlesex supplies fundamental water-related providers to prospects, resembling promoting, distributing, amassing, and treating water. The non-regulated enterprise contains service contracts that embody the operation and upkeep of municipal personal water and wastewater techniques in New Jersey and Delaware.

The overwhelming majority of income comes from the regulated facet. One in every of its largest service areas contains Middlesex County, the place the corporate supplies 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 robust efficiency resulted from the New Jersey Board of Public Utilities (NJBPU)-approved base fee improve efficient March 1, 2024, and elevated buyer demand. Within the Delaware System, income development resulted from buyer development and elevated buyer demand.

An identical pattern 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 fee hike and robust buyer demand.

Development Prospects

Utility firms are sometimes labeled as gradual, however regular growers. This doesn’t essentially apply to Middlesex, nevertheless, as the corporate had an earnings-per-share compound annual development fee of 10% for the 2012 to 2021 time interval. This can be a robust development fee 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.

For the reason that majority of income comes from regulated enterprise, Middlesex is on the mercy of the approval of fee will increase to develop.

Fortuitously, the corporate closely invests in its infrastructure to be able to justify buyer fee 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 increase, because the approval board has at all times authorised the corporate’s request to boost charges.

It’s probably that fee 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 is not going to solely enhance the standard of operations, but in addition result in fee hikes being authorised.

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

Supply: Investor Presentation

Due to this fact, it’s only pure to count on fee hikes to comprise a significant development driver for the utility within the upcoming years.

Along with fee will increase, Middlesex can develop by including new prospects whereas additionally conserving 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 supplies for upkeep of operations and buyer providers.

The non-regulated enterprise may very well be a significant supply of development as nicely. In 2013, Middlesex was awarded a $32 million contract to assemble and keep the water distribution community for the Dover Air Drive Base in Delaware. This contract will present many years of recurring income, because the contract is for 50 years.

We count on 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 typically 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 fundamental staple of all, water. Prospects are going to wish 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, resembling industrial, contract gross sales, and hearth safety, that contribute meaningfully to the corporate’s enterprise.

Given these built-in benefits, many utilities typically 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 throughout the recessionary interval earlier than falling by a excessive double-digit quantity in 2009, displaying 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. Development 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. The corporate just lately raised its dividend by 5% and has now raised its dividend for 52 consecutive years. Middlesex presently yields 2.1%. The corporate has paid a steady dividend since 1912.

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

Lastly, the final element of whole returns will likely be valuation. Shares are presently 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 common valuation of the inventory for the final decade. Reverting to our goal valuation by 2029 would end in a a number of contraction lowering annual returns by 2.9%.

Due to this fact, Middlesex is forecasted to return 3.7% per yr on common by way of 2029.

Remaining Ideas

There may be a lot to love about Middlesex, specifically its monopoly standing, the excessive success of fee improve 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.