Water Infrastructure Stock is a Steady, Long-Term Outperformer

American Water Works Company, Inc (NYSE:AWK) shares have climbed more than 10% since Capital Ideas wrote about the company 16 months ago

Capital Ideas Media | July 29, 2022 | SmallCapPower: Water is life’s most essential commodity. And with population growth, climate change and pollution disrupting the world’s freshwater supplies, it’s a resource that is expected to become more and more valuable in the future.

(Originally published on Capital Ideas Media on March 30, 2021)

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This is a big reason why we think American Water Works Company, Inc. (NYSE:AWK) is a must hold for investors looking for stable, but superior, long-term growth in the water utility space.

[Editor’s Note: Shares of American Water Works have climbed more than 10% since Capital Ideas wrote about the company 16 months ago.] 

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Founded in 1886, but publicly-traded since 2008, American Water Works is the largest, most geographically diverse publicly-traded water and wastewater utility company in the U.S., serving an estimated 14 million people in 46 states.

Since the Company began trading on the NYSE, AWK has increased its annual earnings at a low double-digit pace and is targeting 7% to 10% yearly compounded EPS growth over the next five years.

American Water Works has also raised its dividend every year since going public and said it expects to increase its shareholder distribution at the “high end” of 7% to 10% each year with a payout ratio of 50% to 60%.

The Company has bolstered its growth by making 106 acquisitions since 2015 and plans to spend between $1.4 billion and $1.6 billion on acquisitions over the next five years to acquire smaller, less efficient, water companies as well as small municipal systems in a water utility industry that remains highly fragmented.

Goldman Sachs analyst Insoo Kim cited American Water’s “best-in-class” earnings growth, below-average beta, and ESG-investing friendly profile, which he said warrants its premium valuation within his coverage universe.

The analyst added that he is positive on American Water’s runway of infrastructure investment opportunities as well as its long-term visibility of above-average growth from organic investments.

AWK’s stock price, meanwhile, climbed about 25% during 2020, surpassing the S&P 500’s 16% gain.

Thus, we feel confident holding American Water Works stock for the long term, as we view it as a classic defensive play but with 20% plus average annual return potential for the foreseeable future.

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