When 24/7 Wall St. first named this as a stock to own for the decade in late 2010, the shares came with a 3.6% dividend yield and were trading at just $24.55. Since the start of 2012, American Water Works has more than doubled its nominal dividend per share, and the price of the stock (without backing out dividends) is up close to 350%.
After its next dividend payment is made later this summer, American Water Works will have paid out more than $12 per share in dividends since the start of 2011. Still, the current dividend yield, even after having been raised over time, is barely 1.7% for a new investor wondering if this should still be bought as a new position.
The water utilities current dividend per share is running at $2.00 on an annualized basis. Refinitiv has a consensus earnings estimate of $3.59 per share in 2019 and $3.90 per share in 2021. Even if tax reform is challenged in the years ahead, its dividend actually appears to be safe with room to be raised. American Water Works has a stated strategy to increase its dividend per share by linking its dividend increases to earnings per share growth with a target a payout ratio of between 50% and 60% of its net income.
Where things get difficult to justify for future earnings valuation is that American Water Works now is valued at 32.2 times expected 2019 earnings per share and 29.75 times expected 2020 earnings per share. The earnings multiple, for expected earnings share, is about 19 or 20 times the median consensus earnings estimates for the S&P 500’s utilities sector as a whole.
With shares currently at $116.00 and a 52-week range of $85.88 to $119.30, it would be very difficult to justify calling American Water Works a new stock to buy for the next decade. Then again, it’s just as equally hard to justify calling it a strong sell at the same time, when other public water utility stocks are also valued at a large premium to the electric utilities.
Short sellers also have decided not to stick their necks out too far when it comes to American Water Works and many other defensive water utilities. Less than 2.5% of the company’s float was counted as being short in the latest short interest report.
This group of water utilities has become one of those sectors that money flows into when there is uncertainty and when investors want to become defensive. With an entire market capitalization of only about $44 billion for the entire U.S. public water utilities stocks as a whole, coupled with a lack of active sellers, it’s easy to see how and why these shares are able to keep generating upside at a time that the traditional valuation metrics may be harder to justify.