In a month when utilities have surged to the front of the sector performance list, let’s take a look at American Water Works (NYSE:AWK), which my model has liked a lot all year.
The company is the largest investor-owned water and wastewater utility in the U.S., which gives it the financial heft to fix the many problems in country’s water infrastructure. How big a problem is there? Well a lot of the reservoirs and pipes in use today were built in the 1930s and rarely upgraded since.
The Environmental Protection Agency estimated a few years ago that it would take at least $335 billion to upgrade and repair community-owned water systems. And not much has been done since. So it’s no wonder that for-profit water utilities are making a lot of inroads around the country in buying and fixing up municipally owned systems and jacking up the rates.
The size and reach of the New Jersey-based firm — which sports a $4.9 billion market cap and recorded $2.7 billion in sales last year — gives it advantages in that it can connect new customers to treatment facilities it has already developed. That keeps its costs down, so more money from higher rates goes to its bottom line.
Of course, as a monopoly utility in most of the places it operates, its revenue is restricted by state and municipal regulators, putting a lid on profit potential. That means it is never going to have an incredible year of amazing profitability, but it’s never going to go bust, either.
In 2003, German conglomerate RWE acquired the company and took it private with dreams of huge growth — but then sold it in three years after finding U.S. regulators too restrictive. After the initial public offering and three secondaries in 2008-2009, RWE no longer has a stake in the company.
Although the regulated businesses provide stability, AWK also does unregulated business in fixing up, operating and managing existing infrastructure for government-owned systems. Morningstar analysts see a lot of potential in this side of its business, though of course at a time when cities and states don’t have a lot of money, it’s not going to be huge.
With American Water Works you get a stable business with a touch of upside and a 3.2% annual dividend yield. It’s not the most exciting business in the world, but it has been a steady winner in good times and not-so-good times in the past three years. It’s still a good buy.
For more guidance like this, check out Markman’s daily trading service, Trader’s Advantage, or his long-term investment service, Strategic Advantage
