As you probably already know (and can read on my About me page) I’m an Engineer living in the Netherlands. My country is well known for its water management. We help a lot of countries all over the world with their defense against water (e.q. New Orleans (USA), Venice (Italy), Bangladesh, etc.) – the list goes on and on. We Dutch grew up with water. And yes, me too, and I’m fond of water. Actually I’m a civil Engineer with a master in Coastal Morphology. So water…. A really great and in my opinion an important commodity (for now and in the future). I already did an analysis on American States Water Company (AWR), see here.
But there are a lot of companies associated with water. In todays analysis I take a look at American Water Works Co. Inc (AWK).
This analysis is on American Water Works Co. Inc. (AWK).
Company (from google finance): American Water Works Company, Inc. (American Water) is a water and wastewater utility company. American Water provides drinking water, wastewater and other water related services to an estimated 15 million people in more than 30 states and in two Canadian provinces. The Company operates in two segments: the Regulated Businesses and the Market-Based Operations. In April 2014, the Company’s wholly owned subsidiary Missouri American Water acquired water and wastewater system assets serving customers living in Emerald Pointe development near Branson in southwest Missouri. In April 2014, American Water Works Company Inc acquired Yankeetown Water, a member-owned water utility located in southwestern Indiana. In August 2014, American Water announced that its subsidiary Pennsylvania American Water, closed acquisitions in Clarion, Northampton and Lackawanna counties, comprising the assets of a municipal wastewater system, municipal water system and a privately operated water system.
Can I explain this to a 10-year old? What Does This Company Do?
American Water Works Company Inc provides water and wastewater services to residential, commercial and industrial customers in the United States and Canada. So it delivers water for the tap in your house and cleans your waste water.
Dividend Aristocrat: AWK is paying Dividend for 7 years in a row. It can (at this moment) hardly be called a Dividend Champion. It is number 419 on the CCC-list from David Fish! And is categorized as a Dividend Challenger. On Morningstar.com it has 2 stars. This stock looks promising, but isn’t there yet. That’s a Fail!
Dividend Yield > 2.5%: The dividend Yield of AWK is 2,6%. It is spot on the industry average. The Yield is above the requirements of the Pollie-Code and therefore it passed the second Pollie-code.
Dividend payout <70%: The dividend payout is roughly 59%. This is way below the maximum ratio. This also means that they can keep those dividend increases coming for a long time. And what do you want more as a DGI! So also passed for this point.
DGR 1 year > 0%: The dividend growth rate for 1, 3, and 5 years are 13.5, 8.2, 22.2. This shows a healthy (expected) increase over the years. With a 3 years average over 7% that makes me excited. So AWK also passed the fourth Pollie-code.
P/E-ratio < 15: The industry average is 14.9. AWK has a current P/E ratio is 23.1. This is a clue that the stock might be overvalued. If we look at the current ration we can say that is above the requirement of the Pollie-Code. Therefore this is a fail.
EPS > 0: The EPS is 2.12. So AWK also passed the sixth Pollie-Code
ROE > 10%: Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. The current ROE is 9.30%. This is just below the requirements. So another fail.
Market Cap. > 100M: No problem at this point. More than $ 8.552 Mil. Another pass.
Chowder Rule > 12: Named after “Seeking Alpha” member Chowder. This is a method of identifying candidates for purchase based on a combination of yield and (5-year) dividend growth rate. When the sum of these elements is above 12%, the company presents an attractive entry point (8% for utilities). When the figure is above 8%, an existing holding is still considered worthy of being retained. The current Chowder rule is 24.8. This is way above the requirements of the Pollie-Code. This is therefore a pass on the Pollie-code.
Stock price 52wk high-25%: The 52 wk high and low are: 50.32 and 39.05. This means that AWK will be in my buying zone when the stock price is below 47.05 ((50.32-39.05)*0,75 + 39.05). At this moment it is a fail on the Pollie-Code.
Beta: I think it’s important to have low Beta stocks in my portfolio. This helps to have a stable income all the time, even when the market has a rapid decline. The Beta for AWK is 0.33.
Gordon Growth Model: A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. Given a dividend per share that is payable in one year, and the assumption that the dividend grows at a constant rate in perpetuity, the model solves for the present value of the infinite series of future dividends. On the Internet their 2 formulas can be found.
Stock Value (P) = D / (k-G) or Stock Value (P) = (D*(1+G))/ (k-G)
D = Expected dividend per share one year from now
k = Required rate of return for equity investor
G = Growth rate in dividends (in perpetuity)
When applied to AWK with D = $1.24, G = 8% (see Pollie-Code DGR) and k = 10% (corporate bond rate 2% + inflation rate 2% + equity risk premium 6% (an utility), the intrinsic value will be around $64. Therefore according to the GGM the buy zone is below $64.00. At this moment the stock price of AWK is around 50.12. So AWK is in the buying zone.
Conclusion: When I look at the analysis, AWK passed 6 out of 10 from the Pollie-code. The Pollie-code failed at the Dividend Aristocrat, P/E-ratio, ROE and Stock Price. It is a great stock for the future but now it is overvalued, according to my Code.
If we take a look at Gordon Growth Model we can see that the stock is trading in the undervalued zone. So mixed signals for AWK.
Lets take a look who ones this stock. We can see that the Institutional ownership is around 85%! In normal words: big institutes, such as pension funds, own the majority of AWK. These institutes think it is a safe stock to have. So way should I think different?
In all: I think it is a great stock with a very promising future. I’ll put it on my watch list.
What are you – the readers, thoughts on American Water Works Company? Is it a buy?
Please comment on my analysis and thanks for stopping by!