American Water Works Isn’t Super Sexy, but It’s a Reliable Infrastructure Play

If the inauguration of Joe Biden means Infrastructure Week is finally here, then take a look at American Water Works (NYSE:AWK). AWK stock could have an interesting four years ahead of it.

the interior of a water utility processing plant

Source: Shutterstock

American Water Works is the most valuable company in Camden, N.J. It has twice the market cap of better-known Campbell Soup (NYSE:CPB). The company runs water utilities in 16 states with 3.4 million customers.

It’s a good business. Not fast-growing, but steady. Growth has continued during the pandemic, hitting nearly 16% year-over-year for the September quarter. Almost 25% of that revenue, $264 million out of $1.08 billion, hit the net income line.

One reason you may have never heard of American Water is that, until 2008, it was a unit of RWE (OTCMKTS:RWEOY), a German utility company. The IPO got off to a slow start, but if you put $1,000 into it then, you had $8,000 by the end of 2019.

What’s helping drive the stock are low interest rates. The balance sheet shows almost $9.6 billion of long-term debt, beyond capitalized leases. The company raised $500 million to deal with the pandemic, but the cash was still on the books in September. American Water Works had capital investments of $1.85 billion over the last 12 months.

A New CEO and AWK Stock

Under new CEO Walter Lynch, who was quietly promoted from chief operating officer last year, AWK stock gained about 25% in 2020.

In addition to running municipal utilities, American Water also runs plants for the Department of Defense in 14 states. Its contract at West Point is one of the newer ones, launching in the third quarter of 2020.

These contracts also tend to be long-term. Its most recent military deal, for Joint Base Lewis-McChord in Washington, brings in less than $15.4 million/year, but runs for 50 years.

American Water also runs municipal utilities in 16 states, and each state is regulated separately. Each state unit makes its own acquisitions.

American Water Works’ bonds generally sell at a premium, although they briefly touched $100 at the depths of the pandemic. If you got in then, you’re sitting on a fat profit.

But it’s easier to just pick up the stock, which is up 22% over the last year and has delivered $2.15/share in dividends. The yield looks low, 1.38%, only because the capital gains have been huge. Shares are up 155% over the last five years. If you got in back then, with shares at $65, you have a current yield of 3.3%.

Climate change is even a tailwind for AWK stock. As the weather gets hotter and dryer, people use more of it. During the pandemic, increased demand from homes offset lower demand from commercial buildings.

The full year’s impact on earnings came to less than one dime per share, and the company wound up increasing its guidance for the year to $3.87-3.93/share.

The Bottom Line

For a conservative investor, American Water Works is a long-term winner. It has delivered total returns, including dividends, of 186% over the last five years.

This is not a go-go company. It steadily accretes contracts, delivering very steady earnings and reliable dividends. In 2020 only half its earnings went out the door. The balance sheet looks strong.

The only risk I can see is interest rates. These could be volatile in 2021, as higher spending creates inflation and more competition for money. But water companies have some pricing power, and the company has the financial power to sail through.

Retirees who get into American Water can put their feet up. Happy Infrastructure Week.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/. At the time of publication, Dana owned no shares in companies mentioned in this story.


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