Last update on 2024-06-27

American Water Works (AWK) - Dividend Analysis (Final Score: 5/8)

Analyze American Water Works (AWK) dividends using an 8-criteria system. Get insights on yield, growth rate, coverage ratios, and stability over 20 years.

Short Analysis - Dividend Score: 5

We're running American Water Works (AWK) against the 8-criteria scoring system to evaluate the performance and stability of a company's dividend policy.

We're evaluating the dividend performance and stability of American Water Works (AWK) using 8 criteria. Firstly, AWK has a dividend yield of 2.1%, which is above the industry average of 1.66%. This is positive because it indicates higher income from dividends relative to the stock price. Over the past 20 years, AWK’s dividend growth rate has been stable, averaging above 5%, another good sign. However, the payout ratio varies but averages at 36.39%, well within the acceptable limit of 65%. Importantly, AWK's dividends are well covered by earnings but not by cash flow, as free cash flow has often been negative. AWK has a history of stable rising dividends since 2008, which is good. They haven't paid dividends for 25 years yet but have been consistent over the last 16 years. Lastly, AWK hasn't been consistent with stock repurchases, generally a negative for value return to shareholders.

Insights for Value Investors Seeking Stable Income

AWK shows strong dividend stability and growth, making it attractive for income investors. However, issues like insufficient free cash flow coverage and inconsistent stock repurchases could be concerns. Therefore, AWK is worth considering for its reliable dividends, but potential investors should be cautious about long-term sustainability due to the cash flow issue.

For those who are interested in delving deeper into the specifics, the subsequent section provides a comprehensive exploration of the criteria.

Dividend Yield Higher than the Industry Average?

Dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its stock price. A higher yield is attractive to investors because it implies more income from dividends relative to the stock price.

Given that American Water Works (AWK) has a current dividend yield of 2.1055%, which is above the industry average of 1.66%, this is generally a positive sign for investors seeking income. The trend analysis of AWK's dividend yield over the last two decades shows fluctuations, peaking at 3.6591% in 2009 and dipping to a low of 1.2485% in 2021. While the dividend yield has recently increased, the rising stock price over the same period might cause a lower yield despite higher dividend per share. For context, the stock price has risen significantly from $20.88 in 2008 to $131.99 in 2023. The industry average has also shown volatility, with extreme highs and lows. Overall, AWK's relatively stable and increasing dividend yield, coupled with a rising stock price and increasing dividends per share, positions it favorably for dividend-focused investors.

Average annual Growth Rate higher than 5% in the last 20 years?

The Dividend Growth Rate criterion measures the annualized percentage rate of growth of a company's dividend payments. For American Water Works (AWK), a consistent dividend growth rate above 5% over 20 years signals robust financial health and a commitment to returning value to shareholders.

The data indicates significant variability in the Dividend Ratio for American Water Works (AWK), where values fluctuate dramatically, such as from -30.5785 to 44.0476. Using an average dividend ratio of 13.39%, even with volatility, the average rate does exceed 5%. Consequently, this trend can be seen as positive despite fluctuations, as long-term investors have enjoyed an average dividend growth that outpaces inflation and standard benchmarks.

Average annual Payout Ratio lower than 65% in the last 20 years?

Explain the criterion for American Water Works (AWK) and why it is important to consider

The provided payout ratio values vary significantly each year. However, after calculating the average from 2005 to 2023, we obtain an average ratio of 36.39%. If we exclude the abnormal values in the first two years and the outlier in 2008 and 2009, the trend shows a relatively stable payout ratio. Given this trajectory, the average of 36.39% is comfortably below the 65% threshold. This trend is thus good, indicating financial discipline and stability for AWK's dividend policy.

Dividends Well Covered by Earnings?

Dividends being well covered by earnings involves the relationship between a company's earnings per share (EPS) and dividend per share (DPS). This is important because if a company pays out more in dividends than it earns, it might face financial strain and risk cutting dividends, which can negatively impact investor confidence.

Between 2005 and 2009, American Water Works (AWK) experienced significant volatility in its earnings per share (EPS), with negative values reaching as low as -$3.5159 in 2008. Consequently, dividends per share (DPS) during these years were either non-existent or minimal compared to earnings. By 2010, AWK's financial health began to stabilize, with positive EPS ($1.5294 in 2010) and a more modest dividend payout ratio (0.562). Notably, the earnings growth from 2011 to 2020 shows a healthy trend with consistent EPS increases to as high as $3.9171 in 2020, despite only moderate increases in DPS. After 2020, EPS took a sharp increase to $6.9396 in 2021 but then fell to $4.8912 by 2023, while DPS continued to rise consistently. The coverage ratio also remained above 0.5 since 2011, indicating modest payout ratios and highlighting that AWK's dividends are well-covered by its earnings. This trend is good as it suggests a commitment to rewarding shareholders without overextending its financial resources.

Dividends Well Covered by Cash Flow?

Cash flow coverage of dividends assesses whether a company’s free cash flow sufficiently covers its dividend payouts, indicating sustainable dividend payments.

Upon reviewing the data from 2005 to 2023 for American Water Works (AWK), the free cash flow figures consistently exhibit negative values (except 2014). This raises red flags as to whether the company generates enough cash to cover its dividends. Specifically, the coverage ratio is often significantly less than 1, suggesting that dividends exceed the available free cash flow. For instance, in 2022, the coverage ratio is -0.35, which demonstrates insufficient cash flow. Despite company payouts rising annually from $64 million in 2008 to $532 million in 2023, the lack of supporting free cash flow could pressure future dividend stability. This is generally a negative trend as it signals that the company is potentially funding dividends through debt or other means, which is unsustainable in the long run.

Stable Dividends Since the Company Began Paying Dividends?

The stability of dividend payments over an extended period is crucial for income-seeking investors. Regular and stable dividends suggest company reliability and profitability, acting as a steady income source.

American Water Works (AWK) has shown resilience and stability in its dividend payments over the past 20 years. Starting from 2004, where dividends per share was not recorded, the dividend started in 2008 with a payment of $0.40 per share. From 2008 to 2023, there is no evidence of a single year where dividends decreased by more than 20%. Instead, the dividends have shown a consistent upward trend. For instance, dividends increased from $0.84 in 2013 to $2.779 in 2023. This clearly exemplifies that AWK has managed its resources well and has committed to increasing shareholder value through rising dividend payouts. Income-seeking investors can regard AWK as a stable dividend-paying utility company, supporting steady cash inflow without volatility seen in more precarious investments.

Dividends Paid for Over 25 Years?

Dividends Paid for Over 25 Years? This metric checks if the company has a consistent history of paying dividends for a prolonged period, indicating financial stability and shareholder commitment.

American Water Works (AWK) has paid dividends consistently from 2008 to 2023, a streak of 16 years. Although the company has not reached the 25-year mark yet, the current trend signifies a strong commitment to rewarding shareholders. The dividends started at $0.40 per share in 2008 and have steadily increased to $2.779 per share in 2023. This growth in dividends aligns with a positive and reliable pattern in dividend payments. Investors typically see this trend as a good indicator of the company's financial health and dedication to distributing profits back to shareholders. However, the lack of 25 years of continuous dividend payments may still concern some traditional income-focused investors.

Reliable Stock Repurchases Over the Past 20 Years?

Reliable Stock Repurchases Over the Past 20 Years and why it is important to consider

American Water Works (AWK) has had some years of reliable stock repurchases, specifically in 2006, 2007, 2008, and 2016. Over the past 19 years, the number of shares has generally trended upwards from 188.98 million in 2005 to 193 million in 2023, with an average repurchase rate of approximately 0.2089% per year. This low average rate and infrequent repurchases suggest that stock buybacks have not been a significant or reliable strategy for returning value to shareholders. Generally, a more consistent repurchase trend would be more favorable. This upward trend in share count might dilute existing shareholder value, indicating a negative trend.