Investors don’t often think about a utility stock providing a five-year stock price gain of 107%. But if you had bought and held shares in American Water Works (NYSE:AWK) five years ago, that’s the gain you would be sitting on.
To put that into perspective, Duke Energy (NYSE:DUK) a recognized leader in the utility sector has returned 26% share price growth over that same period. That’s not bad at all for a utility company so it shows you how well AWK has been performing.
However, past performance doesn’t guarantee future results and AWK stock is currently bumping up against the 12-month price target set for it by analysts. In this article, we’ll look at several reasons that the stock may have its price target boosted.
Earnings Were Strong
The company posted a split decision in their August 2 earnings report. The company’s $999 million in top line revenue came in just below analysts’ expectations for $1.01 billion. However, on the bottom line, the story was strong. AWK reported earnings per share of $1.14 beating estimates of $1.08. That number was also 17% higher than the same quarter in the prior year.
And the forward guidance by the company’s management team indicates that they expect EPS to grow between 7% and 10% over the next few years. Part of their rationale for that growth is the expectation of rate base increases that they are projecting to be in the range of 7% to 8%.
A Steady, Solid Dividend
Dividends are a key part of an investor’s total return in a utility stock. While AWK doesn’t have the richest dividend, it’s been growing the dividend at around 10% for the last three years. And the company has increased its dividend in each of the 13 years that it has been publicly traded.
When you couple the company’s strong earnings growth with a payout ratio that is currently about 56.7% of current earnings, there’s every reason for investors to be optimistic about long-term dividend growth at or above current levels.
A Vast Footprint
When you’re considering investing in a utility stock, you must factor in where the company is in operation. This is another strong selling point for American Water Works. The company services over 15 million customers in 46 states. That makes it the most geographically diverse publicly traded water and wastewater utility company in the United States.
A Reopening Play?
In 2021, AWK stock trails the broader market with a return of around 14%. In that same time, the S&P 500 Index has a return of just over 18%. However, the company may begin to see increased revenue from their commercial and industrial customers as the economic recovery continues to gain momentum.
Of course, this is also a potential risk area as the Delta variant of the novel coronavirus is showing signs in some areas of slowing the economic growth that has started.
AWK is a Solid Anchor For Income Investors
AWK stock is trading at slightly higher volume as its ex-dividend date approaches. And with the company having just reported earnings, now may not be the perfect time for new investors to buy. The stock is just over 70 on the Relative Strength Indicator which has been a reliable indicator that the stock is due for a pullback.
That being said, opportunistic investors should watch for that dip (which may come after the company’s ex-dividend date passes on August 9) as a good time to buy into a stock that will likely continue to deliver strong growth in addition to a secure dividend.
Before you consider American Water Works, you'll want to hear this.
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