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The most you can lose on any stock (assuming you don't use leverage) is 100% of your money. But on the bright side, you can make far more than 100% on a really good stock. One great example is American Water Works Company, Inc. (NYSE:AWK) which saw its share price drive 145% higher over five years. But it's down 8.1% in the last week. But this could be related to the soft market, with stocks selling off around 2.5% in the last week.
In light of the stock dropping 8.1% in the past week, we want to investigate the longer term story, and see if fundamentals have been the driver of the company's positive five-year return.
View our latest analysis for American Water Works Company
In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. One imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.
During five years of share price growth, American Water Works Company achieved compound earnings per share (EPS) growth of 10.0% per year. This EPS growth is slower than the share price growth of 20% per year, over the same period. This suggests that market participants hold the company in higher regard, these days. And that's hardly shocking given the track record of growth.
The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).
We're pleased to report that the CEO is remunerated more modestly than most CEOs at similarly capitalized companies. It's always worth keeping an eye on CEO pay, but a more important question is whether the company will grow earnings throughout the years. It might be well worthwhile taking a look at our free report on American Water Works Company's earnings, revenue and cash flow.
What About Dividends?
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. As it happens, American Water Works Company's TSR for the last 5 years was 168%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!
A Different Perspective
American Water Works Company shareholders gained a total return of 12% during the year. But that return falls short of the market. On the bright side, the longer term returns (running at about 22% a year, over half a decade) look better. It may well be that this is a business worth popping on the watching, given the continuing positive reception, over time, from the market. It's always interesting to track share price performance over the longer term. But to understand American Water Works Company better, we need to consider many other factors. Case in point: We've spotted 2 warning signs for American Water Works Company you should be aware of, and 1 of them makes us a bit uncomfortable.