🔥 Stock Idea: American Water Works

Today we’re diving into a business everyone uses but no one talks about.

It might be one of the most essential companies you could ever own, providing something no one can live without.

Today we’re looking at American Water Works.

It has massive scale, serving 14 million people across 24 states with 55,000 miles of pipes.

It operates as a legal monopoly in its service areas, meaning customers have no other choice.

American Water Works also buys up small, struggling municipal water systems and folds them into its giant network to continue growing.

But it’s facing some headwinds:

• New PFAS environmental regulations are forcing them to spend billions on new filters.

• High interest rates make it more expensive to borrow money for all those pipes.

• Getting permission from the government to raise prices (rate cases) can take a long time.

With a decade of growth and a 10-year investment plan worth $48 billion, is this boring utility a buy?

Let’s find out!

American Water Works

• Company name: American Water Works Company, Inc.

• ✍️ ISIN: US0304201033

• 🔎 Ticker: AWK

• 📚 Type: Dividend Growth Stock

• 📈 Stock Price: $139

• 💵 Market cap: $26.9 billion

• 📊 Average daily volume: $230 million

Don’t know American Water Works?

Here are the basics (click on the picture to expand):

Dividend Score

American Water Works receives a Dividend Score of 4/5.

Now let’s dive into the full investment case!

1. Do I understand the business model?

American Water Works is the largest private water and wastewater utility in the United States.

Its business is simple: it owns the treatment plants and the pipes that bring water to your house and take wastewater away.

Because it’s a utility, the government gives it exclusive rights to serve certain areas, and in exchange, the government decides how much the company is allowed to charge.

Revenue Split

The vast majority of money comes from regulated water services.

Here is the split for fiscal year 2025:

• Regulated Water Services: $4.23B (82.3% of revenue)

• Regulated Wastewater Services: $422M (8.2% of revenue)

• Other Regulated Revenue: $68M (1.3% of revenue)

• Non-Regulated (Military Services): $417M (8.2% of revenue)

Source: Fiscal.ai

Geographic Split

All revenue is generated within the United States, but it is concentrated in 5 key states:

• Pennsylvania: 24.1% of revenue

• New Jersey: 23.4% of revenue

• Missouri: 12.2% of revenue

• Illinois: 11.6% of revenue

• California: 7.8%

• Other (9 States): 20.9% of revenue

Who are the customers?

The company has 3.6 million active customer accounts.

• Residential: Families and individuals (54% of revenue).

• Commercial: Small and large businesses (21% of revenue).

• Industrial & Public Authorities: Factories, government buildings, and universities (15% of revenue).

• U.S. Military: They have 50-year contracts to run water systems on 18 different military bases.

Source: Fiscal.ai

What’s the moat?

American Water Works is a regulated utility.

That means if you want water in one of their service areas, you have to buy it from American Water Works. There is no competitor.

Their moat comes down to three things:

1. Exclusive Territories. The government legally prevents anyone else from laying pipes in AWK’s service areas.

2. Scale. American Water is the only player with the size to buy 23 systems in a single year (as they did in 2025) and manage them efficiently across 14 states.

3. Investment Flywheel. The government actually encourages the company to spend money. The more AWK spends on fixing old, leaky pipes, the more profit they are legally allowed to earn. This makes their growth very predictable compared to a normal company.

2. Is management capable?

John C. Griffith - CEO

Mr. Griffith became the President and CEO May of 2025.

Before that, he was the CFO, starting in 2022.

David M. Bowler - CFO

Mr. Bowler took over as CFO when John Griffith moved to the CEO role.

He served as Mr. Griffith’s Deputy CFO and Treasurer since 2022.

During their time, American Water Works has earned attractive returns on shareholder’s money:

Source: Fiscal.ai

3. Has the company grown the dividend attractively?

We look for:

• At least 10 years of dividend growth

• 5-year dividend growth >5%

American Water Works has both.

It has increased its dividend every year since 2008 and has a 5-year growth rate of 8.6% per year.

Source: Fiscal.ai

4. Is the company active in an attractive end market?

The U.S. water market is expected to grow as the country’s aging infrastructure needs to be replaced.

American Water Works management expect to grow EPS at 7-9% per year in the long run.

Source: American Water Works Investor Relations

It’s a very attractive market to be in - think about the tailwinds:

• Acquisition Opportunities: There are 48,000 separate water systems in the U.S. Most are small and breaking down. AWK is the buyer of choice for cities that can’t afford to fix their own pipes.

• Climate Change: As weather becomes more extreme (droughts and floods), the need for professional, large-scale water management increases.

• Clean Water Standards: New laws regarding “forever chemicals” (PFAS) mean every water system in the country needs an upgrade. AWK is better positioned to pay for these upgrades than a small town is.

• Essentiality: You can skip a lot of things, but you can’t skip your water bill. This makes the market one of the most stable in the world.

5. What are the main risks for the company?

Regulation

The company spends billions on pipes today but has to wait months or years for the government to approve the price hike to pay for it. There’s also risk that the government may limit returns to a lower level than they have in the past.
Mitigation: AWK operates in 14 different states, so if one state is being slow or difficult, they can focus their investment in the other 13 states that are more friendly.

Interest Rates

Like most utilities, AWK carries a lot of debt. If interest rates stay high, the cost of that debt eats into their profits.
Mitigation: The company uses long-term, fixed-rate debt and works with regulators to include interest costs as part of the rates they charge customers.

Environmental Liability (PFAS)

New laws require the company to remove certain chemicals from the water. This is very expensive and wasn’t planned for a few years ago.
Mitigation: The company is a leader in water technology and is currently filing for rate recovery to ensure that the cost of these new filters is passed through to the billing rates.

6. Does the company have a healthy balance sheet?

Looking at the balance sheet of a utility like American Water Works is different than looking at the balance sheet of other businesses.

Because utilities are capital-intensive monopolies with highly predictable cash flows, higher levels of debt are normal.

The most important metrics?

• Interest coverage ratio: this tells us if the business can afford the interest payments

• Credit rating: an investment grade rating lets them continue to borrow at lower rates

Here’s how they look for American Water Works:

• Interest coverage ratio: 3.1x

• Credit rating: A (S&P), Baa1 (Moody’s) - both investment grade

Source: American Water Works Investor Relations

American Water Works has a healthy balance sheet for a utility company.

7. Is the company a great capital allocator?

Key signs:

• Payout Ratio <60%

• Effective investments or buybacks

American Water Works tends to maintain a payout ratio below 60%.

Source: Fiscal.ai

American Water Works earns attractive Returns on Shareholders Equity.

Source: Fiscal.ai

8. How does the past and future growth of the company look?

That’s as far as we can go with this free preview.

Want the rest of the investment case, and to find out if American Water Works earns a spot in the Compounding Dividends or High Yield Portfolio?

You can join us here:

One Dividend At A Time,

-TJ

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Dividends, you agree with our disclaimer. You can read the full disclaimer here.