American Water Works Company (AWK) reported 22Q2 EPS of $1.20, up 5% from $1.14 in 21Q2. Operating revenues decreased 6.2% to $937 million, mostly due to the sale of the Homeowner Services (HOS) and New York American Water (NYAM) businesses, offset partially by regulatory rate increases. These same factors contributed to the 3.1% decline in operating income to $327 million. However, interest earned on the senior note taken back on the HOS sale and an increase in other income more than offset the decline in operating income.
Management reaffirmed its full year guidance of $4.39-$4.49 per share, its 2021 capital expenditure guidance of $2.5 billion, its five-year capital spending plan of $13-$14 billion, and its long-term target of 7%-9% average annual EPS growth.
On a total return basis, AWK’s stock has posted a negative total return of -17.0% year-to-date, moderately worse than the S&P 500’s -12.6% total return. All of the underperformance occurred during the transition in the company’s CEOs early in the year. Since mid-February, AWK has slightly and steadily outperformed the S&P 500, delivering a 4.5% positive total return, compared to the S&P 500’s -5.8% total return. AWK’s stock has, however, slightly underperformed its peer group, as measured by the Dow Jones U.S. Water Utilities Index.
Water utilities, including AWK, are seen as safe havens with reliable dividends, which has caused investors to bid up their valuations to 30+ times forward earnings, far above their average earnings growth in the mid- to high single digits.. During this year’s sell-off, the sector suffered a contraction in its average forward multiple for the first time in memory. If the broader market continues to recover, water utilities (and AWK) should be able to achieve a total return equal at least to their dividend yields plus their earnings growth. With such high valuations, it is difficult to posit any multiple expansion. Accordingly, I am maintaining my neutral rating on AWK’s stock and resetting my one-year price target to $168, which represents a price return of 8% and total return of 9.7% from the current quote.
This is a summary of my recent report on American Water Works Company (AWK). For a copy of the full report, please contact me directly.
Subsequent News: On Aug. 17, AWK reported that the New Jersey Board of Public Utilities approved a settlement authorizing a total annualized revenue increase of $45.5 million. The settlement was based upon $985 million of infrastructure investments since its last rate filing in 2020. The settlement provides for a return on equity of 9.6%, rate base of $3.57 billion, common equity ratio of 54.6% and long-term debt ratio of 35.4%.
August 1, 2022 (Subsequent News dated August 19, 2022)
Stephen P. Percoco
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