Why American Water Works Stock Returned 5% in May While the Market Fell 6.4%

The 2019 stock market is paying no heed to T.S. Eliot, who opined in his famous poem The Waste Land that April is the cruelest month.

So far, May is the holder of that dubious title for this year's stock market. Last month, the S&P 500 fell 6.4%, including dividends, which is a huge monthly drop. Annualized, it equates to a return of nearly negative-77%.

By contrast, May was a marvelous month for shares of American Water Works (NYSE: AWK), the largest publicly traded water and wastewater utility in the United States. This so-called "stodgy" utility stock returned 5% last month, equating to an annual return of 60%.

Here's what you should know.

Trade tensions spook the market in May

Until last month, the stock market had been rising at a brisk and steady pace in 2019. The S&P 500 returned 18.3% for the first four months of the year. After May's drop, the index's year-to-date return is now 10.7%.

Considering just 2019's return in a vacuum, however, significantly overestimates how well the market has been performing. The gain in the first several months of the year was essentially just making up for the ground the market lost in the fourth quarter of last year. In fact, the S&P 500 is now lower than it was in September, before it began its plummet in October. The index has returned just 3.8% for the one-year period through May 31 -- quite short of the market's average annual return of about 7%.

We can attribute May's poor stock market performance largely to global trade issues. Trade tensions escalated between China and the United States -- the same big catalyst behind last fall's plunging market. Moreover, on Friday, the last day of the month, President Trump threatened to impose a 5% tariff on Mexican imports until our neighbor to the south, which is our biggest trading partner, stems the flow of migrants into the United States. This news spooked the stock market, which sent the S&P 500 tumbling 1.3%.

In addition, the bond market has recently been flashing what has traditionally been a sign of an impending recession: an inverted yield curve. This occurs when interest rates on long-term bonds are lower than those on some shorter-term ones, indicating that bond traders believe the Federal Reserve needs to cut interest rates. Economists disagree, however, on whether an inverted yield curve has the same predictive power it had in the past.

American Water Works stock benefits from a flight to safety

When there's rough sailing in the stock market, investors in general tend to favor the stocks of solid and dependable companies that pay dividends, such as American Water, whose dividend is currently yielding 1.7%. Moreover, when yields on longer-term bonds become less competitive, income-oriented investors pull money from these bonds and invest it in dividend-paying stocks.

During May, American Water reported its first-quarter 2019 results, but this was non-eventful, with shares little changed following the May 1 release. In Q1, revenue grew 6.8% and earnings per share (EPS) adjusted for one-time items rose 3.4% year over year. The more important thing, however, was that American Water's management reaffirmed 2019 guidance of adjusted EPS growth in the range of 7.3% to 10.3% year over year.

Along with being a shorter-term winner, American Water stock has also been a star performer over the long term. Over the past decade, it's outperformed the S&P 500 by 2.8 times.

This is a stock worth considering buying, or at least putting on your watch list.

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Beth McKenna has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.