American Water Works Co. (AWK 0.56%) released first-quarter 2017 earnings last week. The country's largest publicly traded water and wastewater utility's revenue increased 1.7% year over year, and its earnings per share jumped 13%. This represents a strong start to 2017, following a solid 2016.
Shares of American Water have returned 5.7% in 2017 through Wednesday, somewhat lagging the S&P 500's 7.9% return. However, the stock is still a big winner over time periods longer than one year. For the three-year period, for instance, it's returned 75%, flowing by the broader market's 36% return.
Here's how the quarter worked out for American Water and its investors.
Image source: Getty Images.
American Water Works' key quarterly numbers
| Metric | Q1 2017 | Q1 2016 | Change (YOY) |
|---|---|---|---|
| Revenue | $756 million | $743 million | 1.7% |
| Operating income | $227 million | $214 million | 6.1% |
| Net income | $93 million | $82 million | 13.4% |
| Earnings per share (EPS) | $0.52 | $0.46 | 13% |
Data source: American Water Works. YOY = year over year.
Wall Street analysts were looking for earnings of $0.53 per share on revenue of $759.5 million, so American Water missed the EPS estimate by $0.01 and also slightly missed the revenue consensus. Both its results came in so close to analysts' expectations that many folks -- myself included -- would consider that the company essentially came in on target.
EPS got a boost of $0.02 relative to the year-ago period thanks to the new accounting standard for stock-based compensation. Excluding this benefit, EPS would have increased 8.7% -- still a very solid result for a water utility.
Performance by segment
| Segment | Q1 2017 | Q1 2016 | Change (YOY) |
|---|---|---|---|
| Regulated business | $0.53 | $0.49 | 8.2% |
| Market-based business | $0.04 | $0.03 | 33.3% |
| Parent | ($0.05) | ($0.06) | 16.7% |
| Total EPS | $0.52 | $0.46 | 13% |
Data source: American Water Works. YOY = year over year.
Year-over-year EPS for the core regulated business was up $0.04 per share, driven by higher approved revenue and surcharges to support the infrastructure investments the company made, acquisitions, and organic growth, and slightly offset by lower water demand. The regulated business invested approximately $242 million in the quarter on upgrading infrastructure.
EPS for the market-based business increased $0.01 driven by slight earnings increases in the homeowner services group and Keystone Clearwater -- which provides water and related services to energy producers in the Appalachian Basin region -- partially offset by lower capital upgrade work in the military services group, which completed a major project at Fort Polk in Louisiana in mid-2016.
Acquisitions in 2017
Image source: Getty Images.
In the first quarter, American Water closed on two acquisitions (Shorelands Water Company in New Jersey and the much smaller Meadowbrook Water Company in California) that, combined, brought it about 12,700 new customers. It also has three acquisitions pending (the wastewater facility of McKeesport in Pennsylvania and two much smaller utilities, one in Illinois and one in California) that, combined, will increase its customer count by about 33,000. It also added about 3,700 new customers in the quarter thanks to organic growth in its existing business.
Acquisitions are a key part of American Water's earnings growth strategy. The company's goal is to grow EPS by an average of 7% to 10% per year through 2021, of which 1% to 2% of this is targeted to come from regulated acquisitions. (Infrastructure improvements supported by rate hikes in the regulated business are slated to add 4% to 6% EPS growth per year, with plans for the market-based business to kick in approximately 2% EPS growth per year.)
Dividend increase of 10.7%
In last quarter's earnings report, American Water's management said it foresaw a 2017 dividend hike at the high end of its long-term EPS growth target of 7% to 10%. The company delivered -- and then some -- as it announced that it is raising its dividend by 10.7%. The dividend is payable on June 1 to shareholders of record on May 5.
Efficiency keeps flowing in the right direction
American Water's key operation and maintenance (O&M) efficiency ratio for the one-year period through Q1 was 34.6%, which is a 1 percentage point improvement from its 35.6% for the one-year period ended in Q1 2016. This ratio reflects how well the company is controlling costs in its regulated business -- the lower the ratio, the better.
The water utility has been steadily improving this ratio, as it was above 44% in 2010. Its goal is to hit 32.5% by 2021.
Looking ahead
American Water turned in another good quarter. The company reaffirmed its previously released earnings guidance for 2017: It expects EPS from continuing operations to be in the range of $2.98 to $3.08. This guidance represents projected EPS growth of 4.9% to 8.5%.
As a reminder, American Water's goal is to grow EPS by a compounded average annual rate of 7% to 10% per year through 2020 (from the base year of 2015). The company's early progress on achieving this goal has been good, so there's every reason for investors to expect continued robust growth going forward.
