Morningstar | Increasing Our Market-Based Business Growth Assumption and Raising Our FVE to $83
Since its IPO in April 2008, American Water Works has increased earnings at a low-double-digit pace, topping most of its regulated peers. The earnings growth has rewarded investors, with a total return over 400% in the 10 years since the spin-IPO by German utility RWE AG. The earnings growth has been driven by improving regulatory frameworks, increasing operations and maintenance efficiency (adjusted O&M divided by adjusted revenue), and acquisitions. Although we project EPS growth to slow to about 8.7% over the next five years, this will still top most regulated utilities.American Water Works has now begun accelerating its dividend increases, averaging over 10% per year over the past few years. We expect an annual dividend-growth rate of 10% for the next five years. With the relatively low projected payout ratio of 54% of adjusted earnings in 2018, we believe there is room to increase the dividend faster than earnings growth.In late 2017, management trimmed its growth objectives for its nonregulated businesses, targeting 10% of consolidated earnings by 2022 versus the previous target of 15% by 2021. In 2017, nonregulated businesses generated about 7% of earnings before parent and other expenses and we are bullish on the strategy. Folllowing strong performance year to date in 2018, we now forecast earnings from this segment reaching the 10% target by 2021.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.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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