Utility stocks are often a favorite of dividend-focused investors as they typically offer safe and reliable sources of income. These businesses provide services that are needed regardless of the state of the economy. Steady revenue and profits can translate into dividends for shareholders. In fact, utility stocks can be found throughout the Dividend Kings, which are those companies with at least 50 decades of dividend growth. Utility companies account for seven, or 14%, of the 50 companies that have earned the title of Dividend King.
Water utility stocks: A stable investment
One area of the utility sector that does not receive much discussion is water. Water is the most precious resource on earth as all living things need it to survive. Therefore, companies that operate in the water utility space can likely be counted on to have very stable business models, which can lead to long periods of dividend growth. This could make water utility stocks ideal investments for investors seeking safe and reliable dividends.
Gorman-Rupp: A promising water utility stock
Gorman-Rupp Co. (GRC, Financial) is one such name as the company has built an incredible niche business for itself, which has allowed it to have one of the longest dividend growth streaks in the market. The stock has outperformed the benchmarks this year, returning more than 26% year to date. Still, the stock appears to be trading well below its intrinsic value as measured by GuruFocus. Let’s dive into why I believe Gorman-Rupp could be a strong investment for those looking to add a water utility name to their portfolio.
Background and recent earnings results
Gorman-Rupp was founded in 1933 with a focus on manufacturing pumps and pumping systems. The company carries a midsized designation as it has annual sales of $650 million and a market capitalization of just $849 million. Despite this smaller relative size, Gorman-Rupp has positioned itself as a provider of critical systems that its industrial customers depend upon to run their operations.
The company’s products are used in a variety of end markets, including agriculture, air conditioning, construction, fire protection, petroleum, ventilation, water and wastewater. Water and water-related business make up nearly 60% of annual sales, with non-water adding close to 30% and repair parts contributing the rest.
The company maintains a global leadership position in its industry. Gorman-Rupp has 20 global locations, sells its products to 130 countries and receives approximately one-third of annual revenue from international markets. The pumps the company manufactures are essential, as they account for 11% of annual water infrastructure investment.
Gorman-Rupp released third-quarter earnings results on July 28. The company produced robust results, with revenue surging 44% and adjusted earnings per share improving to 41 cents from 27 cents. Its results topped already heightened expectations for revenue by $14 million and adjusted earnings per share by 14 cents.
Some of the year-over-year growth can be attributed to the purchase of Fill-Rite in 2022, but the underlying business performance was strong. Fill-Rite should add meaningfully to Gorman-Rupp’s results as the company had more than $150 million of revenue in its most recent fiscal year. This marked the second consecutive quarter where the company topped top- and bottom-line estimates. Analysts expect growth to continue as the company is projected to earn $1.28 per share in 2023, which would be a 36% improvement from the prior year.
Dividend and valuation analysis
Gorman-Rupp has a dividend growth streak of 50 years, which is nearly unmatched in the utility sector. The dividend has been increased by approximately 4 cents per share per year over the last decade, equating to a compound annual growth rate of 8.5% since 2013. This is higher than the typical utility name.
The steady high single-digit raises have caused the payout ratio to increase from 29% in 2013 to 73% last year, though the average payout ratio over the last 10 years is 43%. The projected payout ratio for 2023 is 55%, which is a reasonable level and could be a more accurate assessment of dividend safety compared to last year given the addition of Fill Rite. This payout ratio could move lower, especially as the acquisition continues to add meaningfully to results.
Shares of Gorman-Rupp yield 2.2%, which tops the 1.5% average yield for the S&P 500 Index. This is also superior to the stock’s average yield of 1.7% since 2013. With shares trading around $32, Gorman-Rupp has a forward price-earnings ratio of 25. This is an elevated multiple, but not unheard of for water utility companies given the consistency of their results and the safety of their dividends. This is also nearly in line with the stock’s 10-year average price-earnings ratio of 25.5.
Where Gorman-Rupp looks especially attractive is when the share price is compared to its GF Value. With a GF Value of $56.37, shares have a price-to-GF Value ratio of 0.57, implying the potential for excellent returns.
Final thoughts
Water utility stocks are rarely talked about, but they can deliver the same level of consistent results of other types of utilities, perhaps even more so as their services are vital for everyday life. Gorman-Rupp has carved out an important niche area for itself as its water-related products help other industries run their daily operations. Without the company’s products, customers would be unable to perform their basic functions.
As a result, Gorman-Rupp has a long history of being in a position to continuously distribute dividends to shareholders. The dividend growth rate is still high even after five decades of raises and the current yield tops the market average. In addition, shares are trading just below their historical multiple and at a significant discount to their GF Value.
Gorman-Rupp has a lot of characteristics that both income and value investors might find attractive, making the stock a good one to add to an investor’s watchlist.
