Summary
- American Water Works has outperformed nearly all its water utility peers and crushed the S&P 500 this decade.
- P/E ratio expansion is a big reason why AWK's P/E has soared from 18x to 31x.
- I'm doubtful that this will hold up forever.
- This is a solid company at a lousy price; dividend growth investors can do better.
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If you're an investor in American Water Works (AWK), you have to be pleased with your good fortune lately. Not only has the company been one of the top utility stocks in the country over the past decade, but its performance has also gotten even stronger over the past year. The company had a fantastic 2018, largely ignored the October correction, and is now knocking on the door of fresh all-time highs.
American Water Works is continuing to leave its peers, be it the S&P 500, the utility sector, or other water companies, in particular, farther and farther behind. But can the company's breathtaking outperformance keep up? It's a rather curious case.
How Strong Have American Water Works' Results Been?
Before we get too far into this article, I want to make it clear: the company has delivered excellent results. By all accounts, this looks like an operation with great management and assets. And yet, there's a fair price for everything. It seems increasingly clear that investors are getting ahead of themselves in the case of AWK stock in particular. The easiest place to start is with valuation - earnings are going up, sure, but the valuation ratio is going up in tandem. Note carefully, this is a chart of the stock's P/E ratio, not the stock price:
