American Water Works: A Low Volatility Choice

| About: American Water (AWK)

Summary

American Water Works Co(AWK) hit a new 52-week high on April 8, 2016.

Has a consistent payout ratio and a dividend yield of 1.9%.

Has had a positive annual return every year since going public in 2008.

According to Yahoo Finance American Water Works Co(NYSE:AWK) provides water and wastewater services in the United States and Canada. The company offers water and wastewater services to approximately 1,600 communities in 16 states.

American Water Works Co(AWK) gives us many reasons to want to buy it, including:

  • Passes the Equities Lab Low Volatility with Good Returns which has returned over 10% annually with a standard deviation of roughly half of the overall market.

  • Offers a 1.9% dividend yield - and has the cash available to make these dividend payments.

  • As an individual stock, it has averaged roughly 16% annually since 2008.

Low Volatility with Good Returns Stock Screener

This screen specifically looks for company with a beta that ranges between -0.8 and 0.8 and companies that haven't had a many movements in a day greater than 10% in either direction. This results in companies with low overall volatility that may offer long term returns.

  1. Absolute value of Beta < .8

    1. This isolates companies that have typically low volatility and pushes the standard deviation of the strategy down overall.

  2. Absolute value of Beta as of 20 days ago < .8.

    1. This ensures that these companies have had this same volatility level for at least a month.

  3. Close > 10

    1. The goal here is to deal with companies that actually have some substance behind them, being the value investors that we are. Therefore, we set a minimum price/share of $10.

  4. Num Times Large Change < 2

    1. This is a custom formula designed by the Equities Lab team to look for large changes in a stock price over 6 months. It looks how many times a company has a swing of 10% over 20 days within the last six months. Our parameter makes sure that the companies have less than 2 of these swings.

Click to enlarge

This backtest, run over the past twenty years, shows the effectiveness of the strategy used to find AWK. Over the past twenty years this strategy has consistently returned more than the S&P 500, with higher returns, a lower standard deviation, and a 20% lower drawdown.

We've proven that the strategy behind our decision works, now let's figure out if AWK is worth investing in.

Green Flags

  • Hasn't had a down year since going public

    • Not many companies can say that they haven't had a down year since going public, especially when that company has been public for almost 8 years.

Click to enlarge

  • Consistent Payout Ratio

    • This is something we look for as long term investors - especially when we look for income rather than growth stocks. A payout ratio that hasn't changed drastically over the past few years means that we know roughly the size of our dividend each quarter and gives us long term security.

Click to enlarge

  • It's a Utility Company

    • This isn't a quantitative factor, but most utility companies are great long term because they have a constant consumer base and are subsidized by the government. There is virtually no risk of failure.

Click to enlarge

Red Flags

  • Decreasing Dividend Yield

    • As long term investors we never like to see a decreasing dividend yield. This isn't necessarily a red flag for a company as long as their payout ratio is staying fairly constant. However, it could still signal pull backs.

Click to enlarge

Final Thoughts:

Overall, American Water Works has fantastic fundamentals and a track record that can't be beat. Where else can you find a large cap like this that hasn't had a down year since going public? However, the last time their net income had a drop this significant put the company into a few months of very little movement. In the end I would give AWK a buy.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.