At a market cap of $14.6 billion, American Water Works (NYSE:AWK) is the largest publicly traded water utility. The water stock pays a respectable dividend yielding 2% and has rewarded buy-and-hold investors with consistent returns in the last decade.
Investors may have also noticed that American Water Works plans to significantly step up its investment in water infrastructure in the coming years, and may spend as much as $40 billion in the next 25 years. How can it commit such enormous sums of money to capital expenditures?
To answer that question, we’ll need to explore how American Water Works makes most of its money.
Many utilities, whether they provide electricity or water, operate within rate regulated environments. The idea is that residential customers will be protected against shocking rate increases in a short period of time. It also provides a mechanism for utility companies to ask regulators for rate increases that allow for a specified return (and qualify for federal financing to smooth out large capital expenditures of their own). These are often justified by demonstrating investments made since the last rate filing and revealing investments the utility plans to make to continue modernizing distribution infrastructure.
While regulated utility markets are often accompanied by slower rates of business growth, that growth is reliable and predictable. That allows American Water Works to consistently grow revenue, profits, operating cash flow, and dividend distributions. Additionally, acquiring new business