With rates starting to accelerate higher, I think it’s not the best time to be holding American Water Works (AWK). The current point in the cycle means that rates are going to be moving up as central banks tighten policy and utilities will likely feel a significant amount of pain as earnings eroded by higher financing costs. For utilities that already have negative free cash flow and a high level of investment spend, like American Water Works, that can represent significant challenges over the next couple of years and ultimately limit the total return profile available to investors. Utilities, in my opinion, should only be used in the current environment as a downside hedge, but investors must be increasingly selective around valuation and dividend yield.
Source: American Equity Partners
