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Reasons to Add American Water Works (AWK) to Your Portfolio

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American Water Works Company’s (AWK - Free Report) planned capital investments, an expansion of the customer base through organic and inorganic initiatives, cost management and the optimization of market-based businesses are expected to drive its performance over the long run.

Let’s focus on the factors that make this Zacks Rank #2 (Buy) stock a strong investment pick at the moment. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Growth Projection & Surprise History

The Zacks Consensus Estimate for American Water Works’ 2022 earnings has moved up by 0.2% in the past 60 days to $4.46 per share.

American Water Works’ long-term (three to five years) earnings growth is projected at 8.1%.

AWK delivered an average earnings surprise of 5.3% in the last four quarters.

Investment & Cost Management

American Water Works has plans to invest $13 to $14 billion in the 2022-2026 period and $28 to $32 billion in the 2022-2031 period. In 2022, the company is planning to make capital investments of nearly $2.5 billion, with a major portion to be utilized for infrastructure improvements in regulated businesses.

American Water Works has been successful in lowering the O&M efficiency ratio through systematic cost savings and an increase in revenues. AWK lowered O&M efficiency from 46.1% in 2010 to 34.1% in 2021. Also, the O&M expense for the first quarter amounted to $364 million, down 13.1% from the year-ago quarter’s $419 million. The company targets to lower O&M efficiency to 30% in 2026.

Customer Addition

American Water Works is expanding the customer base through organic initiatives and acquisitions. In 2021, AWK expanded its customer base by 20,000 through 23 closed acquisitions in six states. The pending acquisitions as of Mar 31, when completed, are expected to add another 77,300 customers to the customer base.

Dividend

American Water Works has a long history of dividend payments and has paid out dividends to shareholders consecutively since 2008. Over the 2022-2026 period, American Water Works’ dividend growth rate will be at the high end of the 7-10% range, with a target payout ratio of 55-60%. AWK’s board of directors raised its dividend rate by 10% annually for six consecutive years. The new dividend for 2022 is $2.57 per share, which represents an 8.9% increase from 2021.

Currently, the company has a dividend yield of 1.7% compared with the Zacks S&P 500 composite's average of 1.6%.

Return on Equity

Return on Equity (“ROE”) indicates how efficiently a company is utilizing shareholders’ funds in the business to generate returns. At present, American Water Works’ ROE is 11.3%, higher than the industry average of 9.7%. This indicates that the company is utilizing the funds more effectively than industry peers.

Price Performance

In the past two years, American Water Works’ stock has rallied 17.1% compared with the industry’s 7.6% rise.

Zacks Investment Research
Image Source: Zacks Investment Research

Other Stocks to Consider

Some other similar-ranked stocks from the same sector include Consolidated Water (CWCO - Free Report) , American Electric Power (AEP - Free Report) and DTE Energy (DTE - Free Report) .

The long-term earnings growth of Consolidated Water, American Electric Power and DTE Energy is projected at 8%, 6% and 6.2%, respectively.

The Zacks Consensus Estimate for 2022 earnings per share of Consolidated Water, American Electric Power and DTE Energy has moved up 191.3%, 0.83% and 5.7%, respectively, year over year.

CWCO, AEP and DTE delivered an average earnings surprise of 36.5%, 2.4% and 9%, respectively, in the last four quarters.