American Water Works (AWK -0.63%), the largest publicly traded U.S. water and wastewater utility, reported robust fourth-quarter 2023 results on Wednesday after the closing bell.
Shares gained 3.1% on Thursday, though they declined 1.2% on Friday. Thursday's upward move was likely in part attributable to the company easily exceeding Wall Street's revenue and earnings estimates. But a good chunk of Thursday's gain and all of Friday's drop were probably due to overall market dynamics, as major indexes rose on Thursday and fell the next day.
American Water's key quarterly numbers
| Metric | Q4 2022 | Q4 2023 | Change |
|---|---|---|---|
| Revenue | $931 million | $1.032 billion | 11% |
| GAAP operating income | $261 million | $299 million | 15% |
| GAAP net income | $147 million | $171 million | 16% |
| GAAP earnings per share | $0.81 | $0.88 | 8.6% |
Data source: American Water Works. GAAP = generally accepted accounting principles.
Wall Street was looking for Q4 earnings per share (EPS) of $0.83 on revenue of $1.02 billion. So, the company surpassed both expectations.
For full-year 2023, American Water's EPS rose 8.6% year over year, or 7.2% on a weather-normalized basis. This is good profit growth for a large utility, especially a water utility.
Acquisition activity continued at a strong pace in 2023
In 2023, American Water closed on 23 acquisitions across eight states. These deals, totaling $77 million, added about 18,100 new customer connections.
Moreover, at the end of 2023, the company had 25 acquisitions across seven states under agreement. These acquisitions -- which total about $589 million -- will add approximately 88,300 customer connections. American Water has more than 1.3 million total connections, including the acquisitions under agreement.
2024 guidance raised and long-term financial targets reaffirmed
For 2024, management raised its outlook for EPS on a weather-normalized basis to $5.20 to $5.30, up from $5.10 to $5.20. The updated guidance implies annual growth of 9% to 11%, up from 7% to 9%. (2023 weather-normalized earnings were $4.77 per share.)
The company cited increased interest income related to the sale of its former homeowner services group as the reason for the brightened outlook. Specifically, it expects this additional income to tack on $0.10 per share per year to its profits through the note's maturity date of Dec. 9, 2026.
Management also reaffirmed its five-year financial targets, including weather-normalized EPS and dividend-per-share compound annual growth rates of 7% to 9%.
Data by YCharts.
A low-risk dividend payer that's a long-term outperformer
American Water stock, like utility stocks in general, has had a couple of challenging years, as the chart above shows. The stock has been hurt by the Federal Reserve's aggressive interest rate-hiking campaign, implemented to control surging inflation, which was largely caused by the pandemic.
Utility stocks are quite interest rate sensitive because when rates are higher, dividend stocks have increased competition from other types of investments for the dollars of income-oriented investors. Additionally, higher rates raise the debt-servicing costs of utilities.
Economists widely anticipate that the Fed will begin cutting interest rates this year. All other things being equal, declining interest rates should be a positive for utility stocks.
Over the long term, American Water stock has handily outperformed the market. I believe this will continue, thanks in large part to the company's status as the largest water utility in the U.S. -- which gives it an advantage in acquisitions -- along with the increasing scarcity of fresh water due to climate change.
