What happened

Shares of American Water Works (NYSE:AWK) soared 24.9% in 2020, according to data provided by S&P Global Market Intelligence. That handily beat the S&P 500 index's 16.3% gains in the year. The second half of 2020 was particularly strong for American Water, so much so that it ended up as the top-performing water utility stock of 2020.

So what

Although utility stocks are typically defensive, American Water shares couldn't escape the wrath of the stock market crash of March 2020. Stable earnings, however, helped the stock recover. Also, at a time when companies across industries suspended or downgraded guidance, American Water was an exception and increased its full-year guidance in the third quarter.

American Water reported 5.5% and 6.5% growth in sales in its second and third quarters, respectively, as demand for its water and wastewater services, which are essential in nature, remained strong. Its net income grew 7.8% during the nine months ended Sept. 30, 2020. The company also added more than 47,000 customers through a mix of organic growth and acquisitions during the period, having invested nearly $1.38 billion, primarily on infrastructure upgradation.

A glass of water.

Image source: Getty Images.

The third quarter was particularly strong for the utility as hot, dry weather drove up demand for water. Overall, although revenue from commercial and industrial customers declined in the wake of the coronavirus lockdowns, higher demand from residential customers helped offset the weakness.

That encouraged management to increase its 2020 earnings guidance range to $3.87-$3.93 per share from its previous guidance of $3.79-$3.89 per share, representing substantial growth over the company's 2019 earnings of $3.43 per share.

American Water also remained a favorite among dividend investors, rewarding them with a 10% dividend increase in the month of April.

Now what

American Water is expected to deliver strong numbers for the full year 2020 in coming weeks. With management committed to "align dividend increases with long-term earnings-per-share growth" while maintaining a comfortable target payout ratio of 50%-60%, shareholders can safely look forward to another dividend hike in the coming months. I expect it to range between 7% and 10%.

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