Water Water Everywhere

As I have mentioned in previous posts, I am looking for yield (income) with a minimum of risk. This isn’t easy. Bonds pay almost nothing. Stocks seem overvalued, given the actual condition of the economy. Utilities have traditionally offered save havens to frightened retirees (such as myself). I am particularly interested in water utilities. I do not currently have any of these shares in my portfolio, so I might get some safe yield with the bonus of additional diversification.

Unfortunately Schwab rates the entire water utility subsector an F. The analysts at my broker are not too fond of any utilities.

Electric Utilities D
Gas Utilities D
Independent Power F
Multi-Utilities D
Water Utilities F

Schwab follows 12 water utilities. They rate six as C (hold), 2 as D (sell), and 2 as F (dump this dog--today).

This is not uncharacteristic. I have noted that Schwab rates one of my solid reliable singles Piedmont Natural Gas (PNY) as either a D or an F year after year even as it pays a steadily increasing dividend. The price of the stock tends to drift upwards over time. Nothing to write home about, but steady up is good.

Why would Schwab be so harsh on an entire sector? I think they are looking for growth. Regulated utilities do not grow very fast. Dependent on the kindness of state regulators, they tend to putter along paying whatever is considered a fair return on my investment. The good news is the return tends to be fair, at least most of the time.

Let’s look at Aqua America (WTR), a stock I have owned in the past.

Schwab rates WTR – F
Ned Davis rates WTR – Neutral
Argus rates WTR – Buy
S&P rates WTR -- ****
Reuters rates WTR – Outperform
Market Edge rates WTR – Avoid

Six different reports by dispassionate experts produce very different results. It is wise to remember every time a share of stock is bought and sold, someone on each side of the trade thinks they are going to make money. Forbes reports, “Aqua America Inc (NYSE: WTR) made the “Dividend Channel S.A.F.E. 25″ list because of these qualities: S. Solid return — hefty yield and strong DividendRank characteristics; A. Accelerating amount — consistent dividend increases over time; F. Flawless history — never a missed or lowered dividend; E. Enduring — at least two decades of dividend payments.”

That sounds more like a **** rating than like an F to me, but I can’t predict the future.

I am also thinking about Middlesex Water Company (MSEX) and Connecticut Water Services (CTWS), two smaller water service companies that do not have the size or geographic diversity of Aqua America. Just for grins, let’s rack and stack the basic numbers and the Schwab ratings.

MSEX –
Rating C
Beta 0.45
PE Ratio 19.6
Yield 3.75%

CTWS –
Rating D
Beta 0.46
PE Ratio 20.88
Yield 3.21%

WTR –
Rating F
Beta 0.19
PE Ratio 20.44
Yield 2.49%

“If you don’t understand it, don’t buy it,” is the prime directive of investment. I understand water. People drink it. They take baths in it. They flush toilets. They spray it on their lawns. I have just about convinced myself to buy shares in some regulated water company, maybe more than one company? We shall see.

Don’t forget: Let’s be careful out there today.