• Wondering if American Water Works Company stock is offering fair value at today's price, or if you are paying a premium for stability and income.
• The stock last closed at US$126.46, with returns of 2.1% over 7 days and 0.4% over 30 days, while year to date it is down 3.0% and over the last year it is down 7.7%.
• Those mixed returns over 1, 3 and 5 years, down 7.7%, 7.0% and 11.4% respectively, have kept investor sentiment cautious. At the same time, American Water Works Company continues to sit in a regulated utilities space where pricing, capital spending and dividends are often in focus for long term holders.
• Against that backdrop, the company currently records a valuation score of 0 out of 6. The rest of this article will walk through traditional valuation checks such as DCFs and multiples, then finish with a different way to think about valuation that can help you keep the full picture in view.

American Water Works Company scores just 0/6 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 estimates what American Water Works Company stock might be worth by projecting future dividends, growing them at a steady rate and discounting those cash flows back to today.

For American Water Works Company, the model uses a current dividend per share of about US$3.99, a return on equity of 10.40% and a payout ratio of roughly 56.36%. Dividend growth in the model is capped at 3.54%, instead of an uncapped 4.54%, to keep long term assumptions more restrained. The broader expected growth input across the business is 4.54%.

Putting these assumptions together, the DDM produces an estimated intrinsic value of about US$111.87 per share. Compared with the recent share price of US$126.46, this approach suggests the stock is trading at a premium, with the DDM indicating it is about 13.0% overvalued.

For income focused investors, this model indicates that the current price reflects a relatively full valuation for American Water Works Company’s dividend profile rather than a clear bargain.

Result: OVERVALUED

Our Dividend Discount Model (DDM) analysis suggests American Water Works Company may be overvalued by 13.0%. Discover 48 high quality undervalued stocks or create your own screener to find better value opportunities.

Approach 2: American Water Works Company Price vs Earnings

For a consistently profitable company, the P/E ratio is a useful way to see how much you are paying for each dollar of earnings. It reflects what the market is willing to pay today for the earnings the company is generating.

What counts as a “normal” or “fair” P/E depends on how investors view the company’s growth prospects and risk. Higher expected growth or lower perceived risk can justify a higher P/E, while slower expected growth or higher risk usually calls for a lower one.

American Water Works Company currently trades on a P/E of 22.41x. This is close to the peer average of 22.11x and above the Water Utilities industry average of 15.75x. Simply Wall St’s Fair Ratio for the stock is 22.02x, which is a proprietary estimate of what the P/E “should” be given factors such as earnings growth, profit margins, industry, market cap and company specific risks.

Because the Fair Ratio pulls these fundamentals together, it can give you a more tailored reference point than a simple comparison with peers or the broad industry.

With the current P/E only slightly above the Fair Ratio, American Water Works Company appears to be priced at about the level implied by these fundamentals.

Result: ABOUT RIGHT

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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, so Narratives bring your view of American Water Works Company together into a simple story that links what you think about its customers, regulation and infrastructure spending to a financial forecast and then to a fair value. All of this is inside Simply Wall St’s Community page that is used by millions of investors. There you can see, for example, one Narrative that ties in the more optimistic fair value of US$155 based on firmer confidence in earnings, margins and a 22.0x P/E in 2029, and another that anchors closer to US$124 with more caution around costs, regulation and returns. You can then compare each Narrative’s fair value with today’s share price to help decide whether the stock looks expensive or affordable to you, while the platform automatically refreshes those Narratives as new earnings, news and regulatory updates come through.

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.