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American Water's (AWK) West Virginia Arm to Buy Water Assets

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American Water Works Company AWK announced that its subsidiary — West Virginia American Water — and Town of Cedar Grove have reached an agreement, which will allow the former to acquire the town’s water system. This acquisition will ensure the much needed investments for water system upgrades and help American Water in providing high quality and reliable services to Town of Cedar Grove’s 395 customers.

West Virginia American Water will acquire Town of Cedar Grove’s water distribution system, excluding the water treatment plant, and establish an interconnection between the company’s water lines in Kanawha County and the town’s water system. Upon closing of the acquisition, the company will own and operate the water lines as part of the Kanawha Valley water system.

West Virginia American Water recently acquired water systems in the neighboring towns of East Bank and Glasgow as well as expanded operations in the region. The company provides water services to nearly 545,000 people in West Virginia.

Consolidation is a Must for Water Space

American Water is quite active in acquiring small service providers. In 2020, it successfully closed 23 acquisitions via adding 37,800 customers to the customer base and expanding operations in the United States. The pending 27 acquisitions (as of Jan 31) — when completed — will add another 29,800 customers to the customer base. The company is making regular investments to upgrade the existing and acquired assets. American Water has plans to invest $10.4 billion in the 2021-2025 time period and $22-$25 billion in the next decade.

Aging of water and wastewater assets as well as fragmentation are the primary concerns of the existing U.S. water and wastewater industry. Per an American Water report, more than 53,000 water systems in the United States are providing water solutions to customers at present, which creates operational challenges in meeting the requirement for replacement and modification of the aging water and wastewater infrastructure.

Per the Water and Wastewater Equipment Manufacturers Association, an estimated $750 billion investment is necessary to maintain, and expand drinking water as well as wastewater services to meet demand over the next 20 years. It becomes difficult for small operators to source funds to proceed with costly overhauls. Hence, consolidation is a solution for large water utilities with deep pockets to carry out the necessary investments for making upgrades and maintenance of the infrastructure.

Likewise, another water utility, Essential Utilities WTRG has not only expanded water and wastewater operations through acquisitions but also ventured into the natural gas distribution business through the acquisition of Peoples. The company plans to invest $3 billion through 2023 to fortify operations.

Price Performance

Shares of American Water have outperformed the industry in the past 12 months.

Zacks Rank & Key Picks

The company currently has a Zacks Rank #3 (Hold). A couple of better-ranked stocks in the same industry are California Water Service Group CWT and Veolia Environnement SA VEOEY, each currently having a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

California Water Service and Veolia Environnement currently have a dividend yield of 1.64% and 1.47%, respectively. The Zacks Consensus Estimate for 2021 earnings per share of California Water Service has moved up 3.5% in the past 60 days. The Zacks Consensus Estimate for 2021 earnings per share of Veolia Environnement indicates year-over-year growth of 695.5%.

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American Water Works Company, Inc. (AWK) : Free Stock Analysis Report

California Water Service Group (CWT) : Free Stock Analysis Report

Essential Utilities Inc. (WTRG) : Free Stock Analysis Report

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