SJW Group (SJW) is a water utility company that has operations in Silicon Valley area of California and the area north of San Antonio, Texas. The company purchases, produces, stores, purifies and transports water to customers in these areas. SJW Group has a small real estate portion of the company that owns and develops residential and warehouse properties in California and Tennessee.
SJW Group is a member of the Russell 2000 index, the best known benchmark of domestic small cap stocks. According to Vanguard, small caps have out gained the S&P 500 over the past decade. While there are some risks associated with smaller companies due to their size, they also have the potential for higher growth.
This article will look at SJW Group’s recent acquisition news, 2nd quarter earnings results and dividend growth history to determine if this is a small cap company investors should consider owning.
Acquisition News
On March 14th, SJW Group announced that it would be merging with Connecticut Water Service (CTWS) in an all stock merger. CTWS is a water utility company that provides services to 135,000 customers in Connecticut and Maine. On August 6, SJW Group announced that it would be purchasing CTWS for $70 in cash instead of a stock for stock merger. This acquisition will make the new SJW Group the country’s third largest water utility company.
This acquisition is expected to be completed in 2019 and be immediately accretive to earnings for SJW Group. Post completion, 60% of earnings will come from California, 30% will come from Connecticut and the remaining 10% will come from a combination of Texas, Maine and Tennessee.
Investors should be aware that another water utility company, California Water (CWT), offered to buy SJW Group for $70 per share in cash. That offer was rejected by SJW Group.
2nd Quarter Earnings Release
SJW Group released 2nd quarter earnings results on July 25th. The company earned $0.72 per share during the quarter. This result was in-line with what analysts had expected, but declined 20% from the 2nd quarter of 2017. Revenue was down nearly 3% year over year to $99.1 million. Analysts had been expected $104 million in sales for the quarter.
Included in this earnings per share total was a $0.10 charge related to the acquisition of CTWS. Another part of the reason for the decline in earnings was a $4.8 million charge related to tax reform. In addition, water production expenses were higher during the quarter, growing 3% to almost $40 million. SJW Group is having to spend more capital to produce, store and transport water. On the positive side, SJW Group did see an additional $5.7 million in revenue due to water rate increases in California and an additional $3.3 million from higher customer use.
SJW Group’s Earnings & Dividend History
From 2008 through 2017, SJW Group saw earnings go from $1.08 per share to $2.45 per share, good for a compound annual growth rate, or CAGR, of 8.5%. Over that same time period, CTWS earnings per share went from $1.11 to $2.13, a CAGR of 6.7%. Since both companies are of similar size, investors are likely to see an average growth rate of 7.6% going forward. This type of growth is very solid for a water utility company and should help support dividend growth. And dividend growth is something both SJW Group and CTWS are very familiar with.
SJW Group has increased its dividend for the past fifty-one years, making the company a Dividend King. There are only twenty-four other companies that have increased their dividends at least as long as SJW Group has. CTWS is no slouch either in this area, as the company has increased dividends for forty-eight consecutive years. The combined companies have an average dividend growth rate of 3.9% per year over the last ten years. SJW Group yields just 1.7% currently, but that is due in part to shares increasing almost 13% over the past year.
Conclusion
SJW Group’s pending purchase of CTWS is going to diversify the company away from its primarily California based water utility business. Adding additional states to SJW Group’s customer base should grow revenues and earnings immediately. Both SJW Group and CTWS have excellent dividend growth track records, which should very much stay intact due to strong earnings growth rates. While small cap stocks can be risky, water utility company growing revenues, earnings and dividends is likely to reward long term investors.
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