Better Buy: Aqua America, Inc. vs. California Water Service Corp

Water utilities Aqua America, Inc. (NYSE: WTR) and California Water Service Group (NYSE: CWT) both have impressive dividend histories. But with roughly similar businesses, Aqua America's dividend growth stands out, and it's why I think it is the better option here.

In the long run, we all need water

Water is an incredibly important commodity that we take for granted in the United States. If you doubt that, consider that only around 1% of the water in the world is both drinkable and easily accessible. Although we have ample supplies of potable water in America today, that simple fact helps explain why water utilities like Aqua America and California Water Service have such long-term appeal.    

Add to our biological need for this scarce resource the fact that the U.S. water infrastructure system is in dire need of upgrading. That means that water utilities have plenty of opportunities to invest in their current systems and to acquire new assets from cash-strapped competitors and municipalities that can't (or don't want to) come up with the money needed for improvement.  

Size and scale, however, are important when it comes to both costs and growth opportunities. Aqua America is the larger company, with a market cap of around $6 billion and operations in eight states. California Water Service, meanwhile, has a market cap of around $1.75 billion and serves four states. That gives Aqua America a bit of an edge because it has double the number of states in which it can seek out bolt-on acquisitions in the fragmented water sector. It also has more assets over which to spread costs. Its larger size also means that it can probably access the capital markets more easily overall.  

All of that said, I don't think size alone is enough of a differentiator in and of itself. It's when you consider each company's dividend history things start to get a little more clear.

Growth is the name of the game

Let's start with California Water Service, which has an incredible streak of 50 years of annual dividend hikes. Five decades is a record that few companies can claim and is double the 25-year streak of annual hikes that Aqua America has put up. When it comes to dividends, California Water Service wins hands down on consecutive annual increases. That said, 25 years isn't exactly chump change.  

Which is why you also need to look at the annualized growth of those dividends. California Water Service's dividend increased roughly 3% over the past year, with the trailing three- and five-year periods at slightly less than 3% on an annualized basis. The trailing 10-year annualized growth rate, meanwhile, was less than 2% -- partially a function of its exposure to the drought that's been impacting the West Coast.    

These numbers are important because the historical rate of inflation growth is around 3%. If a dividend grows less than the rate of inflation over long periods of time, then the buying power of those dividends is shrinking. That materially changes how you should be looking at California Water Service's dividend. Sure, the dividend has grown each and every year for a very long time, but over the past decade the company's dividend growth hasn't kept up with the historical average growth in inflation. That's a worrying trend.

The picture is very different at Aqua America. This water utility's dividend increased 7.7% over the last year. Over the trailing three- and five-year periods, the annualized increases were around 8%. And the annualized increase over the past 10 years was 7.6%. Dividend growth at Aqua America is running at roughly twice the historical rate of inflation. That means the buying power of Aqua shareholders has been increasing over time. That's not only nice to see, but also much better than California Water Service's record of dividend growth that lags slightly behind inflation.    

Go with dividend growth

When you mix Aqua America's larger size and broader reach with its long history of regular dividend hikes and higher dividend growth rates, it's easy to see why it's a better option than California Water Service Group. There's also another dividend benefit here: Aqua America's yield is around 2.4%. That's 40 basis points better than California Water Service's roughly 2% yield.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.