Is American Water Works Still Attractive After Recent Gains and Dividend Valuation Check?

• Wondering if American Water Works Company is fairly priced or if the market is missing something? You are not alone. This is a classic steady compounder that often flies under the radar.
• The stock is up 6.3% year to date and 7.1% over the last 12 months, even though the past 3 and 5 year returns are still slightly negative. That hints that sentiment may be turning after a long cool down.
• Recently, investors have focused on American Water Works expanding regulated infrastructure projects and ongoing approvals for rate increases in several states. Both of these drivers support more predictable long term cash flows. At the same time, sector wide attention on water scarcity, climate resilience and aging utility networks has put high quality water utilities like American Water Works back on the radar for long term, risk conscious investors.
• Despite that renewed interest, the company only scores a 1 out of 6 on our valuation checks. We will walk through standard valuation approaches next and then finish by looking at a more complete way to think about what this business is really worth.

American Water Works Company scores just 1/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: American Water Works Company Dividend Discount Model (DDM) Analysis

The Dividend Discount Model estimates what a stock is worth by projecting all future dividends a company will pay and discounting them back to today’s value. It is best suited to mature, steady dividend payers like American Water Works Company.

For NYSE:AWK, the model uses a current annual dividend per share of about $3.74 and a return on equity of roughly 10.4%. The company is paying out around 56.2% of its earnings as dividends, which suggests the dividend is reasonably sustainable while still leaving room to reinvest in the business.

Looking ahead, Simply Wall St caps American Water Works Company’s long term dividend growth assumption at 3.26%, slightly below the underlying 4.56% expectation, and uses this to project future dividend streams. Discounting those expected dividends back to today results in an intrinsic value estimate of about $101.11 per share.

With the DDM indicating the stock is roughly 30.2% above this intrinsic value, American Water Works Company currently screens as overvalued on a dividend basis rather than a bargain.

Result: OVERVALUED

Our Dividend Discount Model (DDM) analysis suggests American Water Works Company may be overvalued by 30.2%. Discover 899 undervalued stocks or create your own screener to find better value opportunities.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for American Water Works Company.

Approach 2: American Water Works Company Price vs Earnings

For a stable, profitable utility like American Water Works Company, the price to earnings, or PE, ratio is a useful way to judge valuation because it directly links what investors are paying to the profits the business is generating today. In general, faster growing and lower risk companies can justify a higher PE, while slower growth or higher risk usually calls for a lower, more conservative multiple.

American Water Works currently trades on a PE of about 23.1x, which is a premium to both the Water Utilities industry average of roughly 16.0x and the broader peer group average of around 18.4x. Simply Wall St also calculates a proprietary “Fair Ratio” of 23.6x, which estimates the PE you would expect given the company’s earnings growth outlook, profitability, industry, market cap and risk profile. This Fair Ratio is more tailored than simple peer or industry comparisons because it explicitly incorporates company specific fundamentals rather than assuming all utilities deserve the same multiple.

Comparing the current 23.1x PE to the 23.6x Fair Ratio suggests the stock is trading very close to what those fundamentals justify.

Result: ABOUT RIGHT

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1458 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your American Water Works Company Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let us introduce you to Narratives, which are simple stories you create about a company that connect your view of its future revenue, earnings and margins to a financial forecast and a fair value estimate. On Simply Wall St’s Community page, millions of investors use Narratives as an easy, guided tool to turn their assumptions into numbers, compare the resulting Fair Value to the current share price and decide whether they see American Water Works Company as a buy, hold or sell. Because Narratives on the platform automatically update when new information like earnings releases, regulatory decisions or major news arrives, your fair value view can evolve along with the business. For example, one investor might build an optimistic Narrative that assumes steady rate approvals, 6 to 7% annual revenue growth and a fair value near $159 per share, while another could take a more cautious stance with lower growth, more pressure on margins and a fair value closer to $116, yet both are using the same structured framework to make clearer, more confident decisions.

Do you think there's more to the story for American Water Works Company? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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