• Wondering whether American Water Works Company at around US$124 a share looks rich or reasonable? This article breaks down what that price could mean for long term investors.
• The stock has retreated recently, with the price down 2.7% over the past week, 5.7% over the past month and 11.4% over the past year, which may have some investors reassessing the balance between risk and opportunity.
• Recent headlines have focused on American Water Works Company as a key regulated utility in the US water sector, including ongoing attention on its role in essential infrastructure and service reliability. While these stories highlight the importance of its operations, they also frame the stock as a potential defensive holding that some investors watch closely when prices move.
• Even so, the company currently scores just 1 out of 6 on our valuation checks. Next up is a closer look at how traditional models such as P/E, dividend based valuation and cash flow based approaches assess the stock today, and why a broader way of thinking about value at the end of this article may matter even more.

American Water Works Company scores just 1/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: American Water Works Company Dividend Discount Model (DDM) Analysis

The Dividend Discount Model looks at what a stock might be worth based on the dividends it is expected to pay in the future, adjusted back to today, and how reliably those dividends can be maintained and grow.

For American Water Works Company, the model uses an annual dividend per share of about $4.02 and a payout ratio of roughly 56.36%. That payout sits alongside a reported return on equity of 10.40%, suggesting the company is retaining a meaningful portion of earnings to reinvest while still returning cash to shareholders.

The DDM in this case assumes a dividend growth rate capped at 3.54%, taken from a higher indicative growth rate of 4.54%, with an expected growth figure of 4.54%. Applying these dividend and growth assumptions produces an estimated intrinsic value of about $112.76 per share.

With a share price around $124, this DDM view implies the stock trades at roughly a 10.1% premium to that estimate. On this dividend-based lens, the stock appears slightly expensive relative to the model’s output.

Result: OVERVALUED

Our Dividend Discount Model (DDM) analysis suggests American Water Works Company may be overvalued by 10.1%. Discover 54 high quality undervalued stocks or create your own screener to find better value opportunities.

Approach 2: American Water Works Company Price vs Earnings

For profitable companies, the P/E ratio is a straightforward way to think about what you are paying for each dollar of earnings, which makes it a useful sense check on whether a stock’s price looks stretched or reasonable.

In simple terms, higher expected growth and lower perceived risk can justify a higher “normal” or “fair” P/E, while slower growth or higher risk usually lines up with a lower multiple. So the context behind the number matters as much as the number itself.

American Water Works Company currently trades on a P/E of 22.00x. That sits above the Water Utilities industry average of 15.63x and also a little above its peer group average of 21.29x. Simply Wall St’s proprietary “Fair Ratio” for American Water Works Company is 23.51x, which is the P/E level suggested by factors such as its earnings growth profile, industry, profit margins, market cap and risk characteristics. This Fair Ratio aims to be more tailored than a simple comparison with peers or the wider industry, because it adjusts for company specific features rather than assuming all utilities should trade on the same multiple. Comparing the current 22.00x P/E with the 23.51x Fair Ratio suggests the stock is somewhat undervalued on this metric.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your American Water Works Company Narrative

Earlier it was mentioned that there is an even better way to understand valuation. Narratives bring this to life by letting you set a clear story for American Water Works Company, link that story to specific forecasts for revenue, earnings and margins, and then see a fair value that you can easily compare with the current share price. All of this happens inside Simply Wall St’s Community page, where Narratives are kept up to date as fresh news or earnings arrive. One investor might build a more optimistic American Water Works Company Narrative around the higher analyst price target of US$155.00, while another might anchor a more cautious view around the lower US$124.00 target. Each can instantly see how their chosen story translates into a different fair value and, in turn, a different conclusion about whether the stock looks attractive or stretched at today’s price.

Do you think there's more to the story for American Water Works Company? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.