This week, American States Water (NYSE: AWR ) popped up on my radar as an oversold dividend growth stock with a long history of dividend increases. Shares of AWR have fallen nearly 17% since February 24th when the company released earnings that beat on the top and bottom line. The results were better than expected, however, earnings were down year/year and to add to that, the stock was downgraded by Ladenburg Thalmann from neutral to sell on February 26th and the stock fell over 9% just that day and has continued its downward trajectory ever since. I believe the sell-off in AWR is extremely overdone and the reasons why AWR earnings were down year/year are easily explainable and show that they are temporary in nature. Those items include billings, drought and government projects. Billings In the earnings press release for the 4th quarter, the company noted that results for its water business were down because of ” a delay in recognizing $1.4 million of Water Revenue Adjustment Mechanism (WRAM) revenue.” AWR was delayed in recognizing because of water conservation measures taken by the state of California. Simply put the drought had a negative impact on AWR because it was not able to recognize $1.4 million in revenues during the year, however, they will make up for it in 2016 as the statement from the earnings release shows. ” The impact of state-mandated water-conservation targets on customer usage, GSWC recorded large WRAM balances during 2015. Under current CPUC amortization guidelines, surcharges ranging from 12 – 36 months will be implemented in 2016 to recover the recorded WRAM balances, as well as the $1.4 million not recorded.” Drought Last year California had a very bad drought where as noted about there were mandatory water conservation measures put into place, which affected the results for AWR. This year is looking much better in terms of rainfall and snowfall for California. Rainfall data from the California/Nevada River Forecast Center, which is part of NOAA, showed that of the 49 California locations that monitor rainfall, 33 [67%] had increased rainfall totals from October 2015-March 2016 compared to October 2014-March 2015. In addition, as the following comparison of snowfall totals from the California Department of Water Resources shows, 2016 snowfall totals are massively ahead of where they were last year. The left side of the chart shows that snowfall, as a percentage of normal for this time of year in 2015 was 10%, 13% and 13% in the three regions. This year however, the snowfall totals are significantly better with those same regions posting 102%, 95%, and 79% of normal. With the significant increase in rainfall and snowfall totals 2016 should be a much better year for AWR because there should not be the water shortage like there was in 2015. Click to enlarge [Images from California Department of Water Resources ] Government Projects In the earnings press release for AWR, it was noted that its American States Utility Services subsidiary, which focuses on utility projects for military bases had lower earnings year/year because of a large project that was completed at the end of 2014 and AWR did not have a similar large project completed during the fourth quarter of 2015. This is the most appealing aspect of AWR because they currently operate & maintain water and wastewater systems at nine military bases throughout the United States under 50 year contracts. These long-term contracts give the business current growth as well as long-term stability because of the duration of the contracts. As was noted in an investor presentation in December, “Numerous military bases still to be privatized; active bids are currently in process. Significant water and wastewater contracts to be awarded over the next 5 years.” With its existing portfolio of military bases and the potential for more bases to be served over the coming years, AWR is set up for continued stable growth going forward. Dividend Growth History & Potential AWR has a long history of dividend increases [61 years], with the company classified as a “Dividend King”, that means they have increased their dividend for a minimum of 50 years in a row. With the ability to consistently increase its dividend through any market environment AWR can be a place investors look to for dividend safety in times where there are adverse market conditions. Click to enlarge [AWR December Investor Presentation ] Dividend Growth Potential As you can see in the table below, AWR has a weighted dividend growth rate of 7.15% and I expect the dividend to continue growing over the next 5 years. To determine if that rate of dividend growth is sustainable over the next five years, I conducted an analysis to see if dividends paid as a percentage of net income was less than my self-imposed threshold of 80%. For my calculations, I used the dividend growth rate of 7.15% and I calculated the net income growth excluding discontinued operations over the last five years to be 9.49% and applied that growth for the next five years. The table below shows if AWR continues growing its dividend at its current pace that it will continue to be well below my 80% threshold. Based on my estimates, by 2020, AWR could be paying an annual dividend of $1.24/share or about $0.311/quarter, which is just about 39% above the current quarterly dividend. Estimated Dividend Div Growth Rate Weight Div Rt*Weight 5 Yr 12.28% 20.00% 2.46% 3 Yr 7.24% 30.00% 2.17% 1 Yr 5.05% 50.00% 2.52% Weighted Dividend Growth Rate 7.15% Current Quarterly Dividend 0.224 Shares Outstanding 37.6 Net Income Growth Last 5 years 9.49% Calendar Year Est. Div/Share Shares Divs $ Paid Proj. Net Income Proj. Div as % of Net Inc. 2016 est. 0.94 37.6 35.50 66.24 53.59% 2017 est. 1.01 37.6 38.03 72.53 52.44% 2018 est. 1.08 37.6 40.75 79.41 51.32% 2019 est. 1.16 37.6 43.67 86.94 50.23% 2020 est. 1.24 37.6 46.79 95.19 49.15% ` 2020 Div 1.244 2020 Quarterly 0.311 Current Quarterly 0.224 % Dividend Upside 38.89% Valuation To determine the upside opportunity for AWR, I conducted a discounted cash flow analysis (table below) and found that shares are undervalued at current levels. Because of the nature of its business and the variable nature of free cash flows due to changes in CAPEX, I used cash flows from operations, which are more stable and better reflect the value of cash flows for AWR. Cash flow data is from GuruFocus, long-term growth rate is from Zacks and to determine the discount rate & terminal growth rate, I used the following calculators. I found that shares of AWR are slightly undervalued by just under 10%. While, this may seem low, as I noted in the first section, AWR has potential to increase its cash flows if they were to win the contracts for the military bases that are up for bidding. Discount rate calculator Terminal Growth calculator TTM CF/Share: $2.53 Proj. Long-term growth rate: 3.85% Terminal growth rate: 0.11% Discount rate: 3.47% Fair Value Calculator Assumptions EPS grows for next 5 years. After that, growth levels off to the terminal rate for 15 years. AWR DCF Calculations CF/Share PV Year 1 1 2.63 $2.54 Year 2 2 2.73 $2.55 Year 3 3 2.83 $2.56 Year 4 4 2.94 $2.57 Year 5 5 3.06 $2.58 Year 6 6 3.06 $2.49 Year 7 7 3.06 $2.41 Year 8 8 3.07 $2.33 Year 9 9 3.07 $2.26 Year 10 10 3.07 $2.18 Year 11 11 3.08 $2.11 Year 12 12 3.08 $2.04 Year 13 13 3.08 $1.98 Year 14 14 3.09 $1.91 Year 15 15 3.09 $1.85 Year 16 16 3.09 $1.79 Year 17 17 3.10 $1.73 Year 18 18 3.10 $1.68 Year 19 19 3.10 $1.62 Year 20 20 3.11 $1.57 Fair Value $42.76 Current Price $38.92 Upside/Downside 9.87% Technical Outlook Looking at the technical chart, you can see that AWR has two significant levels of support just below where the stock is currently priced. The upward trending line of support [Red Line] has acted as support for the last four and half years and is currently just below where the stock is currently priced. In addition, if shares of AWR were to breach the upward trend line there is another level of support at $36 [Blue Line], which is another strong level of support. This is where shares failed to break above at the end of 2014 and after shares of AWR broke above the level in 2015, it acted as a strong level of support, making a double bottom during the middle of 2015. With both these levels of strong support nearby, I think shares of AWR are near a bottom. Click to enlarge [Chart from ThinkorSwim Platform] Closing Thoughts In closing, I believe American States Water is worth considering as an addition to dividend growth portfolios because they have increased their dividend each year for the last 61 years, which shows the strength of their business through any type of market. In addition, American States Water has a stable dividend payout ratio, which will allow them to continue increasing their dividend going forward. With the issues that caused the recent sell-off being temporary in nature, an improvement in billings and weather in 2016, along with the potential for increased revenues from new military base contracts, American States Water is poised for a strong rebound from current levels in my opinion. Disclaimer: See here . Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in AWR over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.