American Water Works (AWK -0.63%), the largest publicly traded U.S. water and wastewater utility, reported its third-quarter 2023 results on Wednesday after the closing bell. Shares surged 4.8% on Thursday and tacked on 4.5% on Friday, for a two-day gain of 9.5%. This is a robust performance for a utility stock, especially one of a large company.
This performance can be attributed to a combination of the company's better-than-expected Q3 report and market dynamics. The stock market posted strong gains on Thursday and Friday, driven by the growing sentiment among market participants that the U.S. Federal Reserve is done with raising interest rates.
For some context about how much of a tailwind American Water stock might have received from the market dynamics, you might consider the same two-day performance of other larger water utility stocks: American States Water was up 5% and California Water Service Group was up 6.4%.
Here's how the quarter worked out for American Water and its investors.
American Water's key numbers
| Metric | Q3 2022 | Q3 2023 | Change |
|---|---|---|---|
| Revenue | $1.08 billion | $1.17 billion | 8% |
| GAAP operating income | $439 million | $478 million | 9% |
| GAAP net income | $297 million | $323 million | 9% |
| GAAP earnings per share (EPS) | $1.63 | $1.66 | 1.8% |
Data source: American Water Works. GAAP = generally accepted accounting principles.
Wall Street was looking for earnings per share (EPS) of $1.64 on revenue of $1.14 billion. So the company surpassed both expectations.
Various factors -- such as weather and when acquisitions close -- can make American Water's quarterly earnings somewhat "lumpy." Indeed, what the company calls "favorable weather" (warmer and drier than usual) provided a stronger tailwind to the year-ago quarter's results (added $0.06 to EPS) than it did to the just-reported quarter's results (added $0.04).
It's best to consider results over a longer period than just one quarter. For the first three quarters of this year, EPS was $4.03 per share, up 8.9% year over year. And on a weather-normalized basis, this metric was up 7.7% year over year.
Acquisition activity
In Q3, American Water closed on four acquisitions in three states, bringing its year-to-date total to 14 closed acquisitions in six states. These deals, totaling $36 million, added about 7,900 new customer connections.
In addition, at the end of the quarter, the company had 32 acquisitions across 10 states under agreement. These acquisitions -- which total about $611 million -- will add approximately 88,100 customer connections. American Water has about 1.3 million total connections, including those in the pipeline.
2023 guidance and long-term targets reaffirmed; 2024 guidance initiated
For 2023, American Water reaffirmed 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 weather-normalized EPS growth of 6.1% to 8.3%.
The company also reaffirmed its long-term (five-year) targets, including weather-normalized EPS and dividend-per-share compound annual growth rates (CAGRs) of 7% to 9%.
For 2024, management guided for EPS, on a weather-normalized basis, in the range of $5.10 to $5.20. This outlook represents about 8% growth, compared with the company's weather-normalized 2023 EPS guidance.
A low-risk dividend payer for the long term
I am in full agreement with CEO Susan Hardwick's comment on Thursday's earnings call: "While utility stocks, including ours, have seen the impact on the short term of higher interest rates, history has shown that over medium- and longer-term horizons, the utility sector and certainly American Water has delivered compelling value to investors."
Indeed, over the 10-year period through Nov. 3, American Water stock has returned 270%, compared with the S&P 500 index's return of 199%. And going back to American Water stock's 2012 initial public offering, it's been an even stronger outperformer.
