On Aug 19, 2014, the shares of American Water Works Company, Inc. (AWK) touched a 52-week high of $50.32. The shares finally closed at $49.86, up 0.3% from the previous day’s closing. The rise in the share price was primarily driven by the company’s systematic investments in strategic acquisitions aimed at operational enhancement. In addition, a stable liquidity position backed by strong cash generating capability, infrastructure upgrades and regular dividend payments acted as catalysts.
American Water follows an acquisition-driven growth strategy. The company generally acquires assets having similar lines of business, which are instantly accretive. In the first half of 2014, American Water utilized around $2.9 million for five acquisitions, including four regulated water systems and one regulated water and wastewater system. In the second quarter of 2014, the company generated revenues of $3.5 million from acquisitions.
American Water’s latest acquisition was inked on Aug 14, 2014. The company’s unit Kentucky American Water acquired the water and wastewater assets of the City of Millersburg, KY, for $0.52 million. This will enable the company to expand its scale of operations, thereby meeting increasing customer demand.
Besides American Water, other regulated water utilities like Connecticut Water Service Inc. (CTWS) and Aqua America Inc. (WTR) also adopt a growth-by-acquisition strategy thereby expanding their service footprint.
In addition to acquisitions, American Water invests substantially to upgrade its utility infrastructure. In the first six months of 2014, the company spent around $0.4 billion as capital expenditure and plans to invest $1.1 billion in 2014. A significant part of this capital outlay will go to improve its water and wastewater systems. These initiatives will help American Water to provide reliable services to its customers.
American Water’s stable financial position allows it to pursue a disciplined capital spending program. As of Jun 30, 2014, the company had available credit facility of around $1.2 billion and cash and cash equivalents of nearly $0.03 billion. American Water’s operating cash flow during the first six months of 2014 was $0.5 billion.
True to the nature of all utilities, American Water focuses on maximizing shareholder wealth. On Jul 30, 2014, the board of directors announced a quarterly cash dividend of 31 cents per share, up from the previous payout of 28 cents per share.
American Water currently has a Zacks Rank #3 (Hold). However, another better-ranked water utility worth considering is Consolidated Water Co. Ltd. (CWCO) with a Zacks Rank #1 (Strong Buy).