What happened
Shares of American Water Works (AWK -0.51%) fell as much as 11.1% today without any specific news. Considering that the water utility has been a bastion of stability in recent years, investors might be wondering why the stock is falling during an unfolding economic crisis. Isn't this dividend stock a safe-haven investment?
Well, that's probably the correct way to look at it, especially for investors with a long-term mindset. But it's also worth acknowledging that the company's customer mix will look quite a bit different this year with so much of the nation staying at home. However, that should actually work in the company's favor.
As of 3:26 p.m. EDT on Thursday, the dividend stock had settled to a 10.1% loss.
Image source: Getty Images.
So what
The highly regulated nature of water utilities and wastewater treatment services provides a safe and predictable stream of revenue, income, cash flow, and dividend payments. In 2019, American Water Works generated $3.6 billion in total revenue (including $3.07 billion from regulated markets), and $621 million in net income. That allowed the business to pay out a record $353 million in dividends to shareholders.
The company generates revenue from residential, commercial, and industrial customers. In efforts to mitigate the impact of the coronavirus pandemic in the United States, many cities and states have told citizens to stay at home. Many businesses have told employees to work from home. And many nonessential businesses have closed down for the time being. Those actions are sure to jostle the company's customer mix for 2020.
However, judging from the customer mix in regulated markets last year, everyone staying at home could actually work out to the benefit of the business. On a revenue-per-gallon basis, residential customers are by far the most lucrative group.
|
Customer Group |
Share of Total Regulated Revenue, 2019 |
Share of Total Gallons, 2019 |
|---|---|---|
|
Residential |
60.3% |
49.8% |
|
Commercial |
21.8% |
24.1% |
|
Fire service, public, and other |
6.2% |
15% |
|
Industrial |
4.6% |
11.1% |
Data source: SEC filings.
Now what
If residential water volumes increase with so many individuals staying at home, then it could more than make up for declining volumes sent to commercial, industrial, and other customers. Investors might be more concerned that regulators will delay decisions on rate increases, which are how water utilities achieve their steady growth rates. Even then, it would only create a temporary setback.
Simply put, the information currently available suggests American Water Works is well positioned to make it through the coronavirus pandemic and any ensuing recession.
