American Water Works (AWK 1.24%) released fourth-quarter and full-year 2021 results after the market close on Wednesday, Feb. 16.
Shares of the U.S. water and wastewater utility giant rose 1.2% on heavier-than-average volume on Thursday. That gain is small but it was a nice bump for a utility stock on a day that the S&P 500 index dropped 2.1%. The market's poor performance was driven by heightening Russia-Ukraine tensions.
It seems likely that American Water stock's small gain was in part a positive reaction to the company's earnings release and in part due to market dynamics. The market dynamics involved a flight to safety, which is a relatively common reaction when geopolitical tensions flare.
In 2022, American Water stock is down 21.2% (including dividends) through Feb. 18, while the S&P 500 has lost nearly 9%. As I wrote in my earnings preview, 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.
Image source: Getty Images.
American Water's key quarterly numbers
| Metric | Q4 2021 | Q4 2020 | Change |
|---|---|---|---|
| Revenue | $951 million | $923 million | 3% |
| Net income | $645 million | $145 million | 345% |
| GAAP earnings per share (EPS) | $3.55 | $0.80 | 344% |
| Operational (or adjusted) EPS | $0.85 | $0.80 | 6.3% |
Data source: American Water Works. GAAP = generally accepted accounting principles.
Fourth-quarter GAAP EPS includes a gain of $2.70 per share from the company's sale of its homeowner services (HOS) business in December, reduced by a $0.19 per share contribution to the American Water Charitable Foundation from the proceeds on the sale. The adjusted EPS result excludes this net gain.
Wall Street was looking for adjusted EPS of $0.85 on revenue of $937.3 million. So the company exceeded the top-line consensus estimate and hit the profit expectation on the bull's eye.
For context, in the third quarter of 2021, revenue edged up 1.2% year over year to $1.09 billion. EPS increased 4.8% to $1.53. On a weather-normalized basis, EPS jumped 10% year over year.
Here's how the segments performed in the quarter:
| Segment | Q4 2021 EPS | Q4 2020 EPS | Change |
|---|---|---|---|
| Regulated business | $0.91 | $0.85 | 7.1% |
| Market-based business | $0.08 | $0.13 | (38%) |
| Parent and other | ($0.14) | ($0.18) | N/A. Loss narrowed 22%. |
| Operational (or adjusted) EPS | $0.85 | $0.80 | 6.3% |
| Gain on sale of HOS | $2.70 | -- | -- |
| GAAP EPS | $3.55 | $0.80 | 344% |
Data source: American Water Works.
The earnings decline in the market-based business reflects the company only owning the HOS business for just over two months in the quarter. It sold this business on Dec. 9, 2021.
This sale was a good move, in my view, as I think many utility investors appreciate water and wastewater utility pure plays. American Water is now such a pure play. The only market-based business it now owns is its military services group, which provides water and wastewater services on U.S. military bases under extremely long-term contracts.
What the CEO had to say
Here's most of what CEO Susan Hardwick had to say in the earnings release:
American Water fully executed on the strategy in 2021, continuing our record of significant earnings growth and delivering on our plan, including the completion of the sale of HOS in 2021 and the sales of our regulated subsidiaries in New York and Michigan in early 2022.
We invested $1.9 billion in our regulated business, delivered greater efficiencies in our operations and successfully completed 23 regulated acquisitions during the year. We are also proud that 2021 marked one of our best years of safety performance and a continued recognition of our work to integrate our core values of diversity, inclusion, equity and environmental leadership into everything we do at American Water.
Efficiency continues to improve
American Water's key adjusted operation and maintenance (O&M) efficiency ratio was 34.1% for the one-year period through the fourth quarter (in other words, for full-year 2021), an improvement from 34.3% in 2020. This ratio reflects how well the company is controlling costs in its regulated utility business. The lower the ratio, the better.
Major happenings after the quarter ended
The company completed the sale of its regulated subsidiaries in New York and Michigan in early January 2022 and early February 2022, respectively. It now has regulated utility operations in 14 states.
The purchase prices for these businesses were $608 million (New York) and $6 million (Michigan) in cash.
Guidance
American Water Works affirmed its previously released 2022 earnings guidance and long-term financial targets through 2026.
For full-year 2022, it expects earnings in the range of $4.39 to $4.49 per share. For the five-year period through 2026, it projects an EPS compound annual growth rate of 7% to 9%. And it expects its dividend growth through 2026 to average at the high end of the 7% to 10% range.
