Morningstar | American Water Reports Strong 2Q; 10% Dividend Growth on Track
We are reaffirming our $80 fair value estimate for American Water Works, along with our narrow-moat and stable moat trend ratings, after the company reported strong second-quarter 2018 results and reaffirmed its 2018 earnings guidance range of $3.22-$3.32 per share. Adjusted EPS for the recently ended quarter were $0.83 versus $0.73 in the same period last year. The company posted excellent results in both operating segments. The Regulated segment was $0.08 per share positive versus last year and the Market Based segment was $0.02 per share higher.Although year to date earnings are $1.42 versus $1.26 at this point last year and the company appears on track to be at the upper end of guidance or higher, management typically does not adjust its earnings guidance range until after the third quarter. The third quarter has the most variability due to weather and we are also maintaining our 2018 earnings estimate of $3.25 for now.
American Water reaffirmed earnings growth through 2022 in the top half of its 7%-10% long-term EPS growth rate target, compared with our more conservative estimate of about 8%. We are in line with the company’s 10% annual dividend growth target through 2022, as it should be able to increase its dividend faster than earnings because of a conservative payout ratio that is currently slightly higher than 50%.
American Water Works is a holding company. Through its subsidiaries, the company is a publicly-traded water and wastewater utility company. The company provides drinking water, wastewater and other related services to people in various states. The company's Regulated Businesses provide water and wastewater services to residential, commercial, industrial, public authority, fire service and sale for resale customers. The company's Market-Based Businesses provide complementary home services primarily to residential and smaller commercial customers and water and wastewater services to the United States government on military installations, as well as municipalities, utilities and industrial customers.
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