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Earlier this week we added to the portfolio's position in American Water Works (AWK) shares following the sharp move lower. We now have some understanding why that drop occurred and a plan to upgrade shares of AWK to a "One" rating from "Two."
Here's what happened: The company was shopping an unregistered offering of 11 million shares out of its shelf registration filing, which ultimately priced at $135.50. American Water isn't the only company offering shares or floating debt, a potential sign that companies are shoring up their balance sheets ahead of more dramatic slowdown in the economy.
When it comes to American Water, we have to remember part of the company's M.O. is to upgrade and update water infrastructure across its footprint, which allows it to then petition public utility commissions (PUCs) for water rate adjustment increases. This past December the company was awarded rate increases by the Illinois Commerce Commission and the Pennsylvania Public Utility Commission for rate increases that began earlier this year. As detailed in American Water's latest 10-K filing, it has other rate case filings pending in California, Missouri, and Virginia among others.
We see this latest offering allowing the company to continue on its well worn path, one that continues to drive both earnings growth and cash flow, in turn allowing American Water to continue boosting its annual dividend. Now we're factoring in the around 6% increase in the outstanding share count, and will reduce our price target to $160 from $165. Given the upside to that new target, the company's inelastic business model and dividend increasing nature, we're making our upgrade.
At current levels, members that did not step into the shares when we did earlier this week, should be doing so. If AWK shares linger at or near current levels, we may look to top off the portfolio's position in the coming days.
AAP is long AWK.