American Water Works Company, Inc. (AWK - Free Report) announced that its board of directors has approved an increase in the quarterly dividend rate by 9.9%. The revised dividend will be 50 cents, which will be payable on Jun 4, 2019 to shareholders of record at the close of business on May 13.
The company’s new annualized dividend rate is $2.00 per share, while the current dividend yield is 1.96%, better than the S&P 500 yield of 1.89%. The hike is consistent with the company’s payout target ratio of 50-60% of net income.
Courtesy of consistent investments to strengthen its regulated operations, American Water is able to reliably serve the expanding customer base. Also, improvement in net income helps the company carry out shareholder-friendly moves. Including the current hike, American Water has increased the dividend rate every year since its initial public offering in 2008.
Can American Water Sustain Annual Dividend Hike?
American Water is a regulated utility that invests in regulated operations to expand and upgrade its existing infrastructure. Upgrading aging water, wastewater treatment facilities and water mains helps the company improve the quality and reliability of water and wastewater services.
It aims to invest $8-$8.6 billion from 2019 through 2023 to strengthen its existing water infrastructure. Being a regulated utility, it is applying to the regulatory commission in its service territories for revising water and wastewater rates to recoup investments.
The expected rate revisions are likely to improve its earnings by 7-10% per year in the aforesaid time period and allow management to continue the trend of upward revision in dividend rates.
Regular Investment is Essential for Water Industry
The water and wastewater infrastructure in the United States is aging, and gradually nearing the end of its effective life. Per an American Water Works Association (“AWWA”) report, the cost of restoring aging underground water pipelines in the United States will be at least $1 trillion in the next 25 years.
Given the backdrop, it is essential for water utilities to keep investing for upgrading and modernizing the existing water infrastructure.
Another water utility Aqua America Inc. (WTR - Free Report) aims to make capital investments in excess of $550 million in 2019, after investing $495.8 million in 2018, as part of its ambitious investment target of more than $1.4 billion in the 2019-2021 time period.
Research reports from World Economic Forum indicate that pressures of climate change and population growth may cause water shortages across majority of the United States. However, if we look at it from a positive perspective, there will be ample demand for water in the coming years.
In order to take advantage of the expected growth in the water industry, we can notice that companies like Eversource Energy (ES - Free Report) are venturing into the water space through acquisitions.
Zacks Rank and Price Performance
Currently, American Water has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Shares of American Water have outperformed the industry in a year’s time.
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