American Water Works Q4 Earnings Cap Off a Solid Year

American Water Works (AWK 0.62%) on Wednesday released strong fourth-quarter 2020 results that capped off a solid year. 

Shares of the U.S. water utility giant fell 2.9% on Thursday. That decline is probably in large part attributable to market dynamics. The S&P 500 was down 1.9% on Thursday, and many dividend stocks that are viewed as safe havens -- including those of utilities -- have recently pulled back due to fears of inflation and rising bond yields.

In 2021, American Water stock has returned negative 7.2%, while the S&P 500 has returned 1.7%. Long-term investors shouldn't be fazed by short-term price gyrations. The stock is still a solid outperformer over the medium and longer terms.

Now, let's dive into the company's Q4 earnings and 2021 and long-term outlooks.

Image source: Getty Images.

American Water's key quarterly numbers 

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

Adjusted EPS for the reported quarter excludes a $0.02 benefit from depreciation not recorded as required by assets held for sale accounting. The year-ago period's adjusted EPS excludes a $0.19 after-tax loss from the sale of Keystone Clearwater Solutions' operations.

For the quarter, Wall Street was looking for adjusted EPS of $0.80 on revenue of $975 million, as covered in my earnings preview. So American Water fell short on both counts.

In 2020, the COVID-19 pandemic dampened demand for water from the company's commercial and industrial customers. Many businesses were temporarily closed early in the crisis, and some still aren't fully operational. However, residential demand for water has risen during the pandemic because more people are at home. The net effect of the pandemic was small; management estimates it hurt EPS by $0.02 over the full year.

For full-year 2020, American Water's revenue rose 4.6% year over year to $3.78 billion, and GAAP EPS jumped 14% to $3.91.

Here's how the segments performed in the quarter:

Data source: American Water Works. 

Regulated business EPS growth in the quarter was driven by rate increases stemming from infrastructure investments, acquisitions, and organic growth, partially offset by a decrease in other revenue due to the impacts of the Tax Cuts and Jobs Act.

In 2020, the company closed on the acquisitions of 23 regulated systems across 10 states and added a total of 37,800 customer connections (24,200 wastewater, 13,600 water).

The market-based business' quarterly growth was driven by growth in the homeowner services business along with the military services group operating on two additional bases. In June, the company became fully operational on Joint Base San Antonio and U.S. Military Academy at West Point after being awarded these contracts in 2019.

Efficiency continues to improve 

American Water's key adjusted operation and maintenance (O&M) efficiency ratio was 34.3% in the one-year period through the fourth quarter (in other words, in 2020), an improvement from 34.5% in the year-ago period. This ratio reflects how well the company is controlling costs in its regulated utility business. The lower the ratio, the better.

The company aims to achieve an O&M efficiency ratio of 30.4% by 2025.

What management had to say 

Here's part of what CEO Walter Lynch had to say in the earnings release:

Highlights of our achievements in 2020, an unprecedented year, include approximately $1.9 billion in capital investment, continued cost management, success in growth with 23 completed regulated acquisitions, the addition of our 17th military installation contract, and the execution of enhanced COVID-19 safety protocols. 

Guidance

For 2021, management guided for EPS growth of about 6.9% to 9.5% year over year.

For the five-year period from 2021 to 2025, the company expects an EPS compound annual growth rate (CAGR) of 7% to 10%.

Moreover, it projects average annual dividend growth at the high end of the 7% to 10% range from 2021 to 2025.