The prospect of tariffs under President Donald Trump’s administration has rattled global stock markets. The president has already fired the first shot by threatening tariffs on Columbia, although ultimately Colombia reached a deal to avoid them. Trump imposed tariffs on several countries in his first term and has vowed to double down on them in his second term.
If the trade war and tariff threat wasn’t enough, reports of Chinese artificial intelligence startup DeepSeek’s new AI model led to a massive selloff in Nvidia (NVDA) and other chip names. While China’s prowess in manufacturing is well-known, DeepSeek claims to have developed its AI model at a fraction of the cost. The model would only add to the “AI war” between the U.S. and China, and Trump has already termed it a “wakeup call” for U.S. companies.
Overall, U.S. stock markets are on shaky ground after rallying spectacularly over the previous two years. The fears are not unfounded, especially as broader market valuations are still running higher than historical averages. Moreover, the Federal Reserve’s rate cut trajectory might be a lot slower than previously expected amid fears that Trump’s trade and immigration policies could fuel inflation.
Amid all the noise over the tariffs and the AI war, investors can find solace in safer bets. I believe American Water Works Company (AWK) looks like a good stock to buy in the current macroeconomic environment, especially for investors looking for safe dividend stocks.
AWK Stock Forecast
Of the 15 analysts covering AWK, four have a “Strong Buy” rating while one rates the stock as a “Moderate Buy.” Eight analysts rate American Water Works as a “Hold” and the remaining two as a “Moderate Sell.” American Water Work’s mean target price is $139.25 which is 12% higher than its price on Jan. 29. Its Street-high target price of $164 is 32% higher.
What Makes American Water Works a Good Dividend Stock?
American Water Works has increased its dividends for 16 consecutive years. The company has increased its dividend payouts at an annualized pace of 9.45% between 2014 and 2024 and intends to increase them by 7%-9% over the long term. It targets a dividend payout ratio between 55%-60% which leaves room to invest for growth. The company’s current dividend payout ratio is 58% which is within its target range.
Like fellow regulated utilities, American Water Works has predictable and linear earnings. It expects its earnings per share (EPS) to be between $5.65 to $5.75 in 2025 which it says is 8% higher than its “weather-normalized 2024 EPS guidance.” The company has a reasonably healthy balance sheet and its debt-to-capital ratio (adjusted for cash) was 56% at the end of Q3 – within its target range of up to 60%.
AWK is looking to invest between $17 billion-$18 billion between 2025 and 2029 which is $1 billion higher than the previous five years. American Water Works has a geographically diversified business and is investing to revamp its infrastructure. The company should be able to deliver on its long-term EPS growth forecasts given its ongoing investments.
Should You Buy AWK Stock?
If you are a growth investor, AWK is not something that will fit into your portfolio. It is a regulated water company and cannot increase prices at will. It’s a low-growth but stable and sustainable business generating predictable cash flows. However, for risk-averse investors looking for a relatively safe bet that has the potential to deliver double-digit annualized returns (with dividends) over the next couple of years, AWK would fit the bill.
The stock currently trades at 24.5x its expected earnings over the next 12 months, which is lower than its historical averages. The current dividend yield of 2.48% is also healthy, if not outright mouthwatering. Overall, with the expected volatility in U.S. stocks, conservative investors can find some solace in quality utility plays like AWK.
