Tuesday, February 16, 2016

36th AIM Equity Update by Jack Kitzinger. Connecticut Water Service (CTWS): "Utilities are the strong performer at present - and dividends sure look good relative to negative interest rates"

Connecticut Water Service (CTWS): Reduced Likelihood for an Interest Rate Hike doesn't Hurt CTWS

By: Jack Kitzinger, AIM Student at Marquette University
Image result for connecticut water service


  • CTWS continues to operate in a favorable regulatory environment
  • Weakness in the 10 year treasury continues to make utilities a strong play
  • Dividend guidance remains unchanged after declared dividend on January 22
  • Highly fragmented environment: M&A targets available
  • Overall warm winter, leading to less maintenance expense

Connecticut Water Service (CTWS) is a part of a sector (utilities) that has outperformed the market in since the start of 2016.  With interest rates staying low, and low beta outperforming high beta at the beginning of the year, utilities as a whole have preformed positively, in a down market.  While the company will be unable to grow its customer base without M&A activity, CTWS is poised to continue to preform strongly because of the positive regulatory environment.

Utilities must be able to achieve their designated returns to preform well in the market.  CTWS has one of the most positive regulatory environments in the U.S. because they are meet with the Utility Boards of Connecticut and Maine every six months to make sure they can make those returns.  Also, with a relatively warm winter, the maintenance expense will be less than many past winters, which will also help CTWS achieve their returns.

Recent Performance: Over the past three months, CTWS is up 12.6%.  Over this time, most utilities have preformed well, but CTWS has been able to outperform due to the positive regulatory environment they provide their services in.  Because water utilities have been underbuilt in the past decade, CTWS will be able to continue to invest in their pipeline, and pass costs onto customers.  It is important for CTWS to be able to make returns because regulatory bodies must make decisions in the best interest of the customer base.  As a regulated monopoly, CTWS provides water necessary for homes.

Past Year Performance:  Similar to the past three months, CTWS is up 13.4% over the last year.  Performance in the sector has been good due to strong low beta returns in January and the low interest rates, even after the raise of interest rates in December.  Much of the regulatory reform in the summer of 2015 has led to the ability of CTWS to obtain their returns, and, in the current environment, an ability to continue to strongly preform.

Takeaway:  CTWS has preformed well in this low interest rate environment.  With current market weakness, it seems unlikely that the FED would attempt to increase interest rates in the near future.  The returns for CTWS are very strong when comparing it to the risk of owning the utility (as there is no going concern for them as a regulated monopoly).  With no large changes looking forward in the regulatory environment of Connecticut and Maine, CTWS will serve to be a strong performer with low risk involved.

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