What Separates Excellent Investors from Good Investors

From June of 1990, American States Water has been an excellent investment by just about any metric you could identify. The California utility is perhaps one of the most understandable businesses in the world: it is a water utility. It sells a product that customers will die without. The dividend has been going up for 50+ years. Those are wonderful, wonderful, characteristic traits. Since 1990, every $5,000 invested into American States Water would have turned into $69,000, for a total return of 12.35% annually.

The product (water) is basic and stable, it is easy to understand, you keep getting more and more cash, and you even have built wealth in excess of the S&P 500 over that time frame, which is nice. If you have been a holder of the stock, or anticipate becoming a holder of the stock, I anticipate that American States Water will continue to be a “good” investment going forward. The dividend increases will be there, the growth will be a bit above inflation, and you will continue to build wealth, which is what investing is all about. There is nothing wrong with being a long-term shareholder in American States Water right now.

Yet, if you want to bring a particular intensity to your long-term investing game, I don’t think that buying shares of American Water right now is something wise, and here is why: the reason why American States Water has been able to do so well over the past twenty or so years is because it had an unregulated water business growing alongside its boring old regulated water business.

This division is called American States Utility Services. For the past two decades, they had a huge backlog of projects at U.S. military bases. This allowed the ASUS division to have an outsized impact on the growth at American States Water, and now that source of robust growth is coming to a close. The ASUS division used to be like General Electric or Boeing in that the backlog was so huge that it could print money whenever it wanted, as fast is it could; now, the American States Water management team has to come up with ways to calibrate the work orders at the ASUS division so that the company doesn’t run out of projects.

The implication for prospective investors? Despite the two decades of robust growth at American States Water, shareholders are now looking at this kind of future: 3-4% annual growth if things are worse than expected, 5-6% growth if things go about as expected over the next 10 years, and 7-8% growth in an absolutely realistic best case scenario (to do better than that, something big would have to happen that is nowhere on the radar screen right now).

For investors that want to be truly excellent and make decisions that maximize their opportunity costs within the realm of buy-and-hold investing, I think it makes sense to ignore American States Water and focus on Disney, Coca-Cola, Colgate-Palmolive, Exxon, and Johnson & Johnson. These are companies with reasonable expectations of growth in the 8-11%, with the outside chance that they might do better than that.

Take something like Coca-Cola. The company just had a “bad year” with bottling restructuring and slow volume growth in North America. Yet, the company still managed to achieve earnings per share growth of 7.5%. We’ve almost reached the point where a bad year for Coca-Cola could do better than a good year for American States Water going forward.

That’s a long way of me saying: within the realm of dividend growth investing, not all companies with excellent track records of annual increases are equal. American States Water has an excellent track record of dividend growth dating back half a century, but we have reached a point where the earnings per share growth will be around 5% or 6% in a given year. That’s what the core regulated business does, and the robust growth from ASUS won’t be propelling the company forward from 2014-2034 the way it has taken care of shareholders in recent years. Meanwhile, Disney and Coca-Cola maintain the pricing infrastructure that keeps them set for 10% annual growth going forward over the long-term. If you want to bring that kind of intensity to your wealth-building game, you’ll pay attention to these differences.

3 comments
The Dividend Warrior
The Dividend Warrior

Tim - love your posts.  This article helped to further spark a mental conversation I've been having with myself regarding PPL in my portfolio.  Great high current YOC, but the last dividend increase was about 1%.  I think I can do better long-term.  I'm putting together a post on this topic...I'll link to this article if you're okay with it.


Dividend Warrior

EricRasbold
EricRasbold

I love you works and share many investing strategies with you. I would like to offer one thing as far as the site itself goes: Put a link for users to be able to return to the home page. I stumbled on an old post and decided I wanted to read some more of your stuff, but did not see a link for the main index. Very easy to do.


Slow and steady wins the race; like the movie says, "Patiently, prudently, thriftily invested in the ...." Tuppence for dividends!


mjwrona
mjwrona

Tim - Somewhere along the line, I would love to see an article as to how you perform your due diligence on an investment - from the major topics you look at to the places where you turn to for your information.  I am sure it could be a multi-part series.  Best Regards.