American Water Works (NYSE: AWK), the largest publicly traded U.S. water and wastewater utility company, recently faced a downgrade from UBS, moving from “Buy” to “Neutral.” Rising operational costs and a tougher regulatory environment are key reasons behind the change in sentiment.
🔹 UBS analysts highlighted that inflation-driven spikes in material and labor costs are starting to outweigh the company’s ability to offset them through timely rate adjustments. This dynamic puts pressure on margins and clouds near-term earnings visibility.
🔹 Regulatory lag has become more pronounced in several jurisdictions where AWK operates, meaning the company could see delays between incurring higher costs and receiving approval to raise customer rates accordingly. This mismatch is squeezing profitability.
🔹 From a dividend standpoint, American Water Works still holds appeal. The stock currently offers a dividend yield of around 2.1%. AWK has built a strong track record of consistent dividend growth, with a five-year compound annual growth rate close to 9%. However, with earnings under pressure and payout ratios inching higher, dividend growth could slow compared to its historical pace.
UBS believes that while AWK remains a steady long-term investment in essential services, its current premium valuation leaves little margin for error given the operational and regulatory headwinds it now faces.