American Water Works (AWK 1.24%), the leading U.S. water and wastewater utility, reported better-than-expected fourth-quarter 2022 results Wednesday after the closing bell.
Utility stocks rarely make big moves either way following their earnings releases because their results are usually highly predictable. Indeed, that proved true in this case. In the two-day period following American Water's release, shares edged up 0.2%, while the S&P 500 Index declined 1.7%. Shares have returned 2.8% over the one-year period through Feb. 17, while the S&P 500's return is underwater by 5.3% over this period.
American Water's key quarterly numbers
| Metric | Q4 2021 | Q4 2022 | Change YOY |
|---|---|---|---|
| Revenue | $951 million | $931 million | (2%) |
| GAAP operating income | $220 million | $261 million | 19% |
| GAAP net income | $645 million | $147 million | (77%) |
| GAAP earnings per share (EPS) | $3.55 | $0.81 | (77%) |
| Adjusted EPS | $0.85 | $0.81 | (5%) |
Data source: American Water Works. GAAP = generally accepted accounting principles. YOY = year over year.
The year-ago period's adjusted EPS excludes $2.70 from the company's sale of its homeowner services (HOS) business in December 2021.
The revenue decline was driven by the company's divestitures of its New York state regulated business, in January 2022, and its HOS business. The former generated revenue of $30 million in the fourth quarter of 2021.
The bottom line was also hurt by the sale of the New York business, which generated net income of $4 million, or $0.02 per share, in the year-ago period. That said, the sale of this business seems like a smart move since it generated funds the company can use to make acquisitions in states where it already has operations.
The sale of the HOS business had no net effect on earnings in Q4 2022. The EPS of $0.06 that this business generated in the year-ago period was fully replaced by EPS of $0.06 in Q4 2022 from interest income earned on the seller note and revenue share agreements from this sale.
Wall Street was looking for fourth-quarter adjusted EPS of $0.78 on revenue of $924 million. So the company beat both expectations.
Acquisition activity during 2022
American Water continued its robust pace of acquiring regulated water and wastewater utilities. In 2022, the company added about 70,000 customer connections through 26 closed acquisitions across 7 states. The total price of these acquisitions was $335 million.
In addition, at the end of the year, it had 21 acquisitions across nine states under agreement. These acquisitions -- which have a total price of $326 million -- will add about 32,400 customer connections. The company has roughly 1.3 million total connections, including those in the pipeline.
For context, in 2021, American Water completed 23 regulated acquisitions.
What the CEO had to say
Here's most of what CEO Susan Hardwick had to say in the earnings release:
American Water successfully executed on our strategies in 2022, achieved on-plan earnings growth, and again delivered strong dividend growth to investors. Importantly, we achieved constructive outcomes [rate increases] in general rate cases in three of our largest jurisdictions -- New Jersey, Pennsylvania, and Illinois.
We invested a record $2.6 billion across our business, led by infrastructure renewal, and completed 26 regulated acquisitions during the year. We are also proud that 2022 marked our best year of safety performance on record, and that we established additional GHG [greenhouse gas] emissions reduction goals, including a net zero target by 2050.
Guidance
For 2023, American Water affirmed its EPS guidance of $4.72 to $4.82 on a weather-normalized basis. In 2022, its weather-normalized EPS was $4.45, so its outlook represents annual growth of 6.1% to 8.3%.
It also affirmed its long-term annual weather-normalized EPS and dividend growth targets of 7% to 9%.
As for the dividend, the company raised it by 8.7% in 2022. Shares were yielding 1.75% as of the market close on Feb. 17.
Investors looking for a low-risk, dividend-paying utility stock that has solid total capital appreciation potential will be hard-pressed to find better options than American Water Works. While the stock wasn't one of the best-performing water utility stocks in 2022, it remains the best performer in its industry over the long term.
