American Water Works Dividend Hike: Best Water Stock Again

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American Water Works Co. Inc. (NYSE: AWK) just delivered on yet another big dividend hike under its corporate governance plan for shareholders. The top water utility in America has raised the dividend paid to its shareholders for the fifth consecutive year. Common shareholders will now receive a quarterly payment of $0.28 per share, versus $0.25 per share previously. The real good news is that this leaves plenty of room for dividend hikes in the year and years ahead.

Today’s gain has a dual boost for the water utility giant. It is a 12% actual hike in the dividend on the surface. What matters more than that just the percentage hike is that the dividend yield is rising from 2.40% to 2.69%. American Water’s dividend practice is said to link common stock dividend increases to earnings per share growth. The water utility giant also is said to be targeting a payout ratio between 50% and 60% of net income.

The company is representing that its annualized earnings have increased by 14% from 2010 to 2012 on a compounded basis. Thomson Reuters calculates earnings estimates on a pro forma basis, and the earnings growth for 2013 is projected to be 3.75% and then 7.2% for 2014.

On a normalized earnings basis, the dividend hike today would represent almost 51% of an income payout ratio for 2013. American Water Works trades at a market premium at almost 19 times 2013 earnings and about 17.5 times expected 2014 earnings. We continue to believe that increasingly higher highs will be seen in water stocks. Today’s dividend hike is just one of the reasons.

The increased dividend will be payable on June 3, 2013, to all shareholders of record as of May 24, 2013. Shares are currently down by 0.5%, at $41.65 against a 52-week trading range of $32.75 to $42.53.