American Water Works' Q4 Earnings Cap Off a Great Year

American Water Works Co. (AWK 1.00%) released fourth-quarter and full-year 2016 earnings on Tuesday after the market closed. The country's largest publicly traded water and wastewater utility capped off a strong performance for the year with a solid quarter that had no surprises.

Shares of American Water rose 0.7% on Wednesday, while the S&P 500 was down slightly. The stock has returned 15.4% for the one-year period through Wednesday, versus 24.1% for the broader market. However, it's a decisive outperformer over longer periods, and has returned 372% since its April 2008 IPO, versus the S&P 500's 108%.

Here's how the quarter worked out for American Water and its investors.

American Water Works' key Q4 numbers

Data source: American Water Works. GAAP = generally accepted accounting principles.

Analysts had estimated that American Water would earn $0.57 per share on revenue of $820.5 million, so the company hit the earnings projection on the bull's-eye but fell short on revenue. For the full-year 2016, year-over-year revenue increased 4.5% to $3.30 billion, GAAP EPS declined 0.8% to $2.62, and adjusted EPS jumped 7.6% to $2.84. A 7.6% annual growth rate is strong for a water utility. 

American Water's 2016 GAAP earnings were negatively impacted by an after-tax charge of $0.22 per share in the third quarter related to a binding settlement for all consolidated claims arising from the Freedom Industries' chemical spill in January 2014. 

Image source: Getty Images.

Performance by segment

American Water's regulated business continues to drive its earnings, as shown below.

Data source: American Water Works.

EPS for the core regulated business was up $0.01 per share, driven by continued strong revenue growth partially offset by the timing of certain operation and maintenance expenses. EPS for the market-based business was up $0.01 per share primarily due to price redeterminations in the military services group. 

For the full-year 2016, its Keystone Clearwater Solutions business, which supplies water and related services to natural gas exploration and production companies in the Appalachian Basin, had a neutral effect on 2016 earnings, as American Water had been projecting.

Record acquisitions in 2016

American Water made six acquisitions in 2016, three of which closed during the year and added about 42,000 new customers, and three of which are pending and will add about 40,000 new customers. The year marked a record for acquisitions.

Closed acquisitions include the wastewater system assets of the Sewer Authority of the City of Scranton, Pennsylvania; Environmental Disposal Corporation, a wastewater utility operating in New Jersey; and the wastewater system assets of the Borough of New Cumberland in Pennsylvania. Pending acquisitions include the wastewater facility of McKeesport in Pennsylvania; the Shorelands Water Company in New Jersey; and Meadowbrook Water Company in California.  

American Water is based in Southern New Jersey, and a bulk of its operations are in its home state and neighboring Pennsylvania, which is why all the acquisitions except one are located in these two states. The company's strategy is to expand near where it already operates, as this results in increased efficiencies.

Investors can probably expect about a 10% dividend hike in 2017

In its earnings release, American Water included that it foresees a 2017 dividend increase at the high end of its long-term EPS growth target of 7% to 10%. 

American Water has raised its dividend every year since it went public in 2008. 

Key efficiency metric continues to improve

American Water's operation and maintenance (O&M) efficiency ratio for 2016 improved to 34.9% from 35.9% for 2015. This ratio reflects how well the company is controlling costs in its core regulated business; the lower the number, the better.

The company has made steady progress in lowering this ratio in recent years, as it was 44.2% in 2010. Given its great progress, American Water set a new and more challenging goal. Its former goal was to achieve 34% by 2020; its new goal is to reach 32.5% by 2021.

2017 and long-term EPS growth targets  

American Water reaffirmed its 2017 earnings guidance to be in the range of $2.98 to $3.08 per share. Adjusted EPS came in at $2.84 in 2016, so this guidance represents projected EPS growth of 4.9% to 8.5%. Wall Street estimates that it will earn $3.04 per share in 2017.

The company also reaffirmed its 7% to 10% annual EPS growth rate target through 2021. This target is comprised of 4% to 6% EPS growth from infrastructure investments in its regulated business, 1% to 2% EPS growth from regulated acquisitions, and about 2% EPS growth from its market-based segment.

In short, American Water posted a solid quarter to a great year. As previously noted, a 7.6% annual growth rate is strong for a water utility. And based upon the company's 2017 and long-term guidance, investors should expect continued strong growth ahead.