EUR 850.00 For Business Accounts Only

Morningstar | Strong Earnings Growth on Track at American Water Works

Since its initial public offering 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 of almost 500% in the 11 years since the spin-IPO by German utility RWE.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 9% 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. The company's 54% projected payout ratio based on adjusted 2019 earnings is low for the sector, thus 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, or market-based segment, targeting 10% of consolidated earnings by 2022 versus the previous target of 15% by 2021. In 2018, nonregulated businesses generated about 9% of adjusted earnings before parent and other expenses, and we are bullish on the strategy. We project annual EPS growth of roughly 12% from the market-based segment over the next five years, resulting in the 10% goal being achieved by 2020 or 2021.