American Water Works Earnings: What to Watch on Feb. 16

American Water Works (AWK 2.22%) is slated to release its fourth-quarter and full-year 2021 results after the market close on Wednesday, Feb. 16. A conference call with analysts is scheduled for the following day at 9 a.m. ET.

In 2022, shares of American Water, which is the largest publicly traded U.S. water and wastewater utility, are down 14.8% through Jan. 31. This performance trails that of the broader market, as the S&P 500 index has lost 5.2% over this period. The market has been struggling because of expectations that the Federal Reserve will raise interest rates several times this year. Interest-rate sensitive stocks, which include utilities, have generally been struggling the most.

Long-term investors shouldn't pay too much attention to short-term or even medium-term market dynamics. 

Investors should know that American Water entered 2022 with a nice infusion of cash. On Dec. 9, 2021, it closed on the sale of its homeowner services business for approximately $1.275 billion, which included $485 million in cash. This was followed by its Jan. 1, 2022, closing on the sale of its New York state regulated utility business for $608 million in cash.

Here's what to watch in the company's upcoming Q4 report.

Image source: Getty Images.

Key quarterly numbers

Here are American Water's results for the year-ago period and Wall Street's estimates to use as benchmarks.

Data sources: American Water Works and Yahoo! Finance.  GAAP = generally accepted accounting principles. 

In the fourth quarter of 2020, American Water's bottom line got a $0.02 per share boost from depreciation not recorded as required by assets held for sale accounting. Excluding that benefit, Wall Street's consensus estimate for Q4 2021 represents growth of 9% year over year.

For context, in the third quarter of 2021, the company's revenue edged up 1.2% year over year to $1.09 billion. EPS increased 4.8% to $1.53. Earnings growth was driven by continued growth in the the company's regulated businesses from infrastructure investment, acquisitions, and organic growth, partially offset by a $0.07 per share impact from weather that was cooler and wetter than in the year-ago period. On a weather-normalized basis, EPS jumped 10% year over year.

Regulated business efficiency

Investors should continue to monitor American Water's adjusted operation and maintenance (O&M) efficiency ratio. This ratio, which is for the trailing year, reflects how well the company is controlling costs in its regulated business. The lower the number, the better.

In the third quarter, this ratio was 33.9%, an improvement from 34.2% in the year-ago period. 

Guidance

Last quarter, American Water established its 2022 and five-year earnings guidance. For 2022, management expects earnings per share (EPS) between $4.49 and $4.49. (We don't know what annual percentage growth range this guidance implies since we don't yet know full-year 2021 EPS.) Any notable change in this guidance would likely move the stock.

For 2022 through 2026, management expects EPS to grow at an average annual rate of 7% to 9%. Moreover, it projects that the average annual dividend increases will be at the high end of the 7% to 10% range over this period.

Interested in more information on dividend-paying water utility stocks? Here's an article on the best-performing water utility stocks of 2021. American Water was fifth among nine stocks.