A small-cap bonus
Middlesex Water Company (NASDAQ:MSEX), a small-cap water utility company celebrating 115 years in operation, has grown its dividend at an average CAGR of 5.7%, nearly three times as fast as the company’s annual EPS growth over the same period. Middlesex operates in a supportive regulatory environment in a “low risk monopoly water distribution business,” according to the firm. It has a stable residential and commercial customer base and mainly regulated operations, which provides for stable cash flows and dividends. This stock is an income play. As regards its growth, last year, Middlesex reported an 8.1% increase in consolidated operating revenues, a 7.2% increase in earnings, and a 7.1% increase in diluted earnings per share. Continued water rate increases suggest continued revenue growth in the future. However, despite the robust top line growth, its EPS is pressured by rising operating and maintenance expenses. Despite its appeal as an income stock, in terms of total returns, Middlesex has underperformed the broader market and regulated water utilities as a group over the 1-year, 3-year, 5-year, and 10-year periods.
In terms of valuation, Middlesex is priced at 19.4x forward earnings, which is higher than the water industry’s forward multiple of 16.1x. Its five-year ROE of 8.1% is below the industry’s 13.2%. Among hedge funds, last quarter, Mario Gabelli held a relatively small $1.9 million stake in the stock.
These companies tend to have respectable market positions in their industries, boasting stability and consistency of earnings through all economic cycles. Generally, their capacity to generate ample cash flow and their prudent financial management have enabled them to grow dividends for such long periods of time. Each makes a solid investment over the long haul.