Artesian Resources: A Small-Cap Water Utility For Consistent Dividend Growth

Core Viewpoint - Artesian Resources is a small water utility with growth potential, operating as a regulated monopoly, which allows for steady growth and consistent dividend increases. The stock is currently undervalued, with a high yield and acceptable safety, making it a long-term buy for dividend growth investors [1]. Company Overview - Founded in 1905, Artesian Resources provides water and wastewater services in Delaware, Maryland, and Pennsylvania, serving 301,000 people and delivering 8.8 billion gallons of water annually through extensive infrastructure [2]. - The company reported total revenue of over $98.9 million in 2023 and$103.1 million in the last twelve months [2]. Revenue and Earnings Growth - Revenue and earnings per share (EPS) have generally trended upward over the past decade, with a record revenue of $98.9 million in 2022, slightly declining to$98.86 million in 2023. Revenue growth is typically in the low-to-mid single digits [3]. Market and Growth Potential - Delaware's population growth of approximately 1% to 1.5% annually contributes to an expanding customer base, with Artesian Resources engaging in partnerships and M&A to enhance growth. The company has applied for a rate increase, which was approved at 15% for June 2024 [4][6]. Challenges - Despite growth potential, Artesian Resources faces limitations due to Delaware's small initial population and limited M&A opportunities. The company also contends with risks such as cyber-attacks and natural disasters [8]. Competitive Advantages - As a regulated monopoly, Artesian Resources benefits from stable revenue and cash flow, with a recession-resistant business model. Revenue and EPS grew during the COVID-19 pandemic, highlighting its essential service nature [9]. Dividend Analysis - The decline in share price has led to a dividend yield of 3.27%, higher than the 5-year average of 2.59%. Artesian Resources has a 32-year streak of dividend increases, with an annual growth rate of 3% to 4% [10][11]. - The payout ratio is 65% based on an estimated 2024 EPS of $1.92, supported by operating cash flow of$32 million in 2023 [11]. Valuation - The current share price of approximately $36.11 suggests that Artesian Resources is slightly undervalued, with a fair value estimate of$38.40 based on a P/E ratio of 20X. Sensitivity analysis indicates a fair value range of $36.48 to$40.32 [12]. Final Thoughts - Water utilities like Artesian Resources are favorable for dividend growth investors due to their stable characteristics. The company is expected to rebound in 2024 due to rate increases and potential interest rate cuts, making it an attractive long-term investment [13].