American Water Works Company (NYSE:AWK) Is Increasing Its Dividend To US$0.60

American Water Works Company, Inc.'s (NYSE:AWK) dividend will be increasing to US$0.60 on 1st of September. This makes the dividend yield about the same as the industry average at 1.4%.

Check out our latest analysis for American Water Works Company

American Water Works Company's Payment Has Solid Earnings Coverage

Unless the payments are sustainable, the dividend yield doesn't mean too much. Before making this announcement, American Water Works Company was earning enough to cover the dividend, but it wasn't generating any free cash flows. No cash flows could definitely make returning cash to shareholders difficult, or at least mean the balance sheet will come under pressure.

Over the next year, EPS is forecast to expand by 9.0%. If the dividend continues along recent trends, we estimate the payout ratio will be 58%, which is in the range that makes us comfortable with the sustainability of the dividend.

American Water Works Company Has A Solid Track Record

The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. The first annual payment during the last 10 years was US$0.88 in 2011, and the most recent fiscal year payment was US$2.41. This means that it has been growing its distributions at 11% per annum over that time. It is good to see that there has been strong dividend growth, and that there haven't been any cuts for a long time.

American Water Works Company Could Grow Its Dividend

The company's investors will be pleased to have been receiving dividend income for some time. It's encouraging to see American Water Works Company has been growing its earnings per share at 8.2% a year over the past five years. The lack of cash flows does make us a bit cautious though, especially when it comes to the future of the dividend.

Our Thoughts On American Water Works Company's Dividend

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While American Water Works Company is earning enough to cover the payments, the cash flows are lacking. We would be a touch cautious of relying on this stock primarily for the dividend income.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. To that end, American Water Works Company has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.

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