American Water is the largest U.S. water utility, and it is merging with Essential Utilities. Regulated returns make its earnings steady, growing 7–9% a year. But its 2.6% dividend yield is half what a 10-year Treasury pays today, which makes it hard to justify the price on dividends alone.
The dividend model’s bear-to-bull range, the probability-weighted value, the price and its 52-week range. The copper line marks the base case; the fine dotted line is today’s close.
Written on October 20, 2026, before its third-quarter results later this month. Figures are from the company’s filings and releases unless noted. Not investment advice. The author holds AWK shares.
American Water supplies drinking water and wastewater service in 14 states and to military bases. State regulators set its prices to allow a fair return on the money it invests (its rate base), so profits grow as it replaces old pipes and treatment plants.
In October 2025 it agreed an all-stock merger with Essential Utilities (0.305 American Water shares per Essential share; about 69/31 ownership), creating a company with roughly $29 billion of rate base. Closing is expected by the end of the first quarter of 2027.
Second-quarter EPS rose 8% and full-year guidance was affirmed. Regulators have approved $216 million of annual revenue increases this year, and requests for another $494 million are pending in six states. The merger has three state approvals so far.
| FY2021 | FY2022 | FY2023 | FY2024 | FY2025 | TTM Jun 2026 | |
|---|---|---|---|---|---|---|
| Revenue | $3.9B | $3.8B | $4.2B | $4.7B | $5.1B | $5.3B |
| Operating margin | 30.6% | 33.8% | 35.7% | 36.9% | 36.7% | 37.1% |
| Net income | $1.3B | $0.8B | $0.9B | $1.1B | $1.1B | $1.1B |
| Operating cash flow | $1.4B | $1.1B | $1.9B | $2.0B | $2.1B | $2.3B |
| Capital spending | $1.8B | $2.3B | $2.6B | $2.9B | $3.1B | $3.4B |
| Free cash flow | −$0.3B | −$1.2B | −$0.7B | −$0.8B | −$1.1B | −$1.0B |
Operating cash flow covers only about two-thirds of capital spending, so free cash flow is negative every year. That is normal for a utility: the gap is funded with new debt and occasional equity, and the investment earns a regulated return.
Debt is about $16 billion against $11.7 billion of equity. The company sold forward 8.1 million shares in 2025 at about $140 and still has 4.7 million to settle by year-end, so modest dilution is part of the plan.
For a regulated utility that funds growth with debt, a free-cash-flow model does not work; the dividend is the cleanest measure of what owners receive.
| Assumption | Base case | Basis |
|---|---|---|
| Dividend, next 12 months | $3.58 growing | $0.895 a quarter |
| Dividend growth, 5 years | 8% | Midpoint of the 7–9% target |
| Then | Fades to 3.5% by year 10 | Long-run nominal growth |
| Cost of equity | 8.3% | 5.15% Treasury, beta 0.70 (utility average), 4.5% premium |
| Bear | Base | Bull | |
|---|---|---|---|
| Dividend growth, 5 years | 6% | 8% | 9% |
| Long-run growth | 3.0% | 3.5% | 4.0% |
| Cost of equity | 9.3% | 8.3% | 7.8% |
| Value per share | $69 | $100 | $132 |
| Probability | 25% | 50% | 25% |
Weighted 25/50/25: $101.
| Cost of equity | 7.0% | 7.5% | 8.0% | 8.5% | 9.0% |
|---|---|---|---|---|---|
| Value per share | $139 | $121 | $107 | $96 | $87 |
Every figure in this valuation comes from one model script, rerun and checked against this page each time the site is built. The XLSX model rebuilds it in live formulas: change any blue input and every year’s cash flow, the bridge to the value, the scenarios and the sensitivity table recalculate.
| To reach today’s price, you need | Instead of |
|---|---|
| A cost of equity of about 7.1% | 8.3%, with Treasuries at 5.15% |
| Or dividends growing about 5% a year forever | 3.5% long run |
Investors are treating American Water almost like a bond. That works when interest rates fall; with the 10-year Treasury above 5%, it is a stretch.
| Risk | Why it matters |
|---|---|
| Interest rates | Utility shares move inversely to bond yields; higher yields mean lower prices. |
| Regulation | Rate cases that grant less than requested slow earnings growth. |
| Merger | Approvals, integration costs and the share issuance to Essential holders. |
| Contamination rules | PFAS treatment requirements raise costs, though usually recoverable in rates. |
Upside: falling interest rates would lift the value quickly: at a 7% cost of equity the model gives $139.
American Water’s earnings are among the most predictable in the market, but the price implies a cost of equity well below what today’s Treasury yields justify.
What would change the value: Lower long-term interest rates, or rate-case outcomes that lift allowed returns, would raise the value; higher yields would lower it.
Ranges, not three cases. The expected value is the average of 4,000 runs of this report’s own model, with every input drawn from a range: the base case is the middle, and the bear and bull cases are the 10th and 90th percentiles. Business inputs move together; the discount rate moves on its own. The 25/50/25 weighting in the valuation section gives $101. How the ranges work
Two different questions. The rating is relative: it asks whether the stock is cheaper or dearer than the S&P 500 on the same assumptions. The absolute view asks whether it is worth its price at all: on its own the stock trades above our estimated value, which is 28% below the price.
On the same assumptions every report uses (a 5.15% Treasury yield and a 4.5% equity premium), the S&P 500 itself is worth about 68% of its price. The rating compares each stock with that: Buy if it is at least 15% cheaper than the market on this basis, Sell if at least 15% dearer, Hold in between. It is the same rule for every company, whoever owns it. The rating depends on that assumption: it would be Buy if the index grows 6% a year and Hold at 10%, against 8% here. How ratings work
| Measure | American Water Works | Industry median | Rank | |
|---|---|---|---|---|
| Revenue growth, last fiscal year | 10.1% | 9.7% | 14 of 31 | Better than the median |
| Operating margin | 37.1% | 23.1% | 1 of 31 | Better than the median |
| Price to earnings | 25.2× | 21.4× | 27 of 31 | Worse than the median |
| Free cash flow yield | −3.6% | −4.0% | 15 of 29 | Better than the median |
Peers: the 30 other S&P 500 companies in Utilities with complete data (AEE, AEP, AES, ATO, CEG, CMS, CNP, D, DTE, DUK, ED, EIX, ES, ETR, EVRG, EXC, FE, LNT, NEE, NI, NRG, PCG, PEG, PNW, PPL, SO, SRE, VST, WEC, XEL). Last twelve months where reported, from SEC filings; prices from the latest close. A lower price-to-earnings ratio ranks higher. These figures update with each data run; the rating does not.
The earnings are reliable; the valuation is a bet on interest rates.