AWK American Water Works
Best-in-class water franchise earning allowed returns, but 2.45x book already prices in the growth.
The story
American Water is the largest US investor-owned water and wastewater utility. It operates regulated monopolies in 14 states, with constructive rate mechanisms and a long runway of pipe-replacement capex. Its earned ROE of about 10.4% tracks allowed returns, and revenue keeps compounding at a high-single-digit rate as rate base grows and tuck-in municipal acquisitions add to it. The balance sheet is investment grade but carries more leverage because of the capex program. The stock trades at about 2.45x book, which already prices in years of excess returns.
Trailing ROE of 0.104 confirms the 0.102 normalized figure, which sits in line with allowed returns of about 9.5-10.5% after regulatory lag, so I kept the drivers unchanged. Book growth of 6.5% reflects 8-9% rate-base growth partly funded with debt and dividends. Terminal growth of 4% stays below the 4.96% risk-free rate. Beta of 0.5 is slightly below the 0.55 industry anchor because water is the least cyclical of the regulated utilities.
Value drivers
| Return on equity (normalized) | 10.2% |
| Book-value growth (Y1) | 6.5% |
| Terminal book growth | 4.0% |
| Beta | 0.50 |
| Failure probability | 0.5% |
| Cost of equity | 7.2% |
Valuation bridge
| PV of excess returns | 2.83B |
| PV of terminal excess | 7.58B |
| Equity value | 21.14B |
| ÷ shares → per share | $106.40 |
News
neutral +0.15 · 8 articles
- 3 U.S. Utility Stocks Built For Higher Rates And Inflation Pass Through
- What Does American Water Works Company (AWK) Gain From Its Digital Push And Training Hub?
- Can Rising Water Demand Boost California Water's Long-Term Growth?
- How Is American Water Works' Stock Performance Compared to Other Utility Stocks
- CWT Unit Gets Rate Hike Nod to Recover Infrastructure Investments
- American Water Works Sees Declining Regulatory Risk as Merger Advances, UBS Says
- Can Approved Rate Hikes Drive American Water Works' Long-Term Growth?
- Why Is American States Water (AWR) Up 4.7% Since Last Earnings Report?
Projected excess returns on equity
| Yr | Book equity | ROE | Excess return | PV |
|---|---|---|---|---|
| 1 | 10.84B | 10.2% | 323.70M | 301.92M |
| 2 | 11.54B | 10.2% | 344.74M | 299.92M |
| 3 | 12.26B | 10.2% | 366.08M | 297.05M |
| 4 | 12.98B | 10.2% | 387.61M | 293.36M |
| 5 | 13.70B | 10.2% | 409.20M | 288.87M |
| 6 | 14.42B | 10.2% | 430.73M | 283.61M |
| 7 | 15.13B | 10.2% | 452.06M | 277.63M |
| 8 | 15.84B | 10.2% | 473.05M | 270.97M |
| 9 | 16.52B | 10.2% | 493.54M | 263.69M |
| 10 | 17.19B | 10.2% | 513.39M | 255.84M |
Key risks
- Rate-case outcomes or regulatory lag push earned ROE below 10%, and the premium to book compresses
- Higher-for-longer rates raise the cost of equity and debt funding for a program of $3B+ a year in capex
- PFAS remediation costs and affordability pushback limit how much of that cost can be recovered in rates
Catalysts
- Constructive rate-case decisions and more states adopting fair-market-value acquisition laws
- Falling long-term yields lift the valuations of bond-proxy utilities