Water Utility Stock AWK a Great Dividend and Growth Pick
Posted on October 17, 2011 at 06:37 AM EDT
American Water Works AWK is an up-and-coming utility stock investment with big growth potential and a good, sustainable dividend yield.
American Water Works (NYSE:AWK) could be your best dividend stock to buy right now, with a yield over 3% and the prospect of a great earnings report soon.
Utility stocks are back in fashion thanks to the uncertainty on Wall Street. You won’t find more reliable revenue streams than power and electric companies. After all they are legalized monopolies! Throw in high dividend yields often north of 4% and you can understand the appeal.
Water stocks like AWK, however, are often overlooked. But they are another great utility sector option and a cash rich investment to consider for the long term. Many investors are still overlooking publicly traded water companies either because they don’t know the potential or don’t understand the business. That’s a shame, because water stocks like this one are in many ways superior to utility stocks that just traffic in power production and distribution.
First, the big picture: the Utilities SPDR ETF (NYSE:XLU), which is made up of some of the biggest utilities on Wall Street like Southern Co. (NYSE:SO), Exelon (NYSE:EXC) and Dominion Resources (NYSE:D), is up almost 9% this year compared to a market that has only recently squeaked out a gain. The XLU utility ETF boasts a 4% yield to boot.
Tough to top, right? Well consider that the top water utility stock, American Water Works (NYSE:AWK), is up 17% year-to-date in 2011 and still has over a 3% yield despite the big run-up in share price. AWK stock is up 40% in the last 12 months while the Dow Jones is off about -10%.
The fundamentals of this stock are remarkably strong, too. American Water Works reports earnings on Nov. 1, and the company has raised EPS guidance to between $1.75 and $1.82 over a previous range of $1.65 to $1.75. That’s not just a significant increase, but a significant vote of confidence – seeing as AWK will have to beat this new and more impressive mark in just a few weeks to win Wall Street’s favor.
But an earnings beat from American Water Works is very likely what’s in store. The higher EPS forecast doesn’t factor in the fact that the company has discontinued operations in Arizona, New Mexico, Texas and Ohio – something outsiders may think would hurt revenue, but in fact will really juice the balance sheet by virtue of no “depreciation” to write down. Water distribution is a capital intensive business with a lot of facilities and hardware, so the cost of maintaining those operations is gone. So is the natural write-down of values in older equipment as a result of use.
But don’t think this is just a short-term earnings play. Like all utility stocks, AWK favors the buy and hold mentality best. A stable and growing $5 billion market cap means you don’t have to feel like a water stock has to be a small cap gamble. American Water Works also has a bit geographic footprint, unlike many electric utilities, giving it growth potential and a big market to tap into.
Also, the dividend is very sustainable, currently 23 cents a quarter like clockwork – up from 22 cents this summer.
Oh and by the way, everybody needs water to survive.
No wonder AWK closed last week at about $30 a share and will set a new 52-week high soon after it crosses $31 a share. The forward P/E is a bit high at 15.7, but clearly investors are banking on future growth to drive this company. That seems likely given American Water Works stock and its track record of success.
Jeff Reeves is editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.
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