American Water Works Earnings: Regulatory Execution Aids Strong Results

We are reaffirming our $136 per share fair value estimate after American Water Works AWK reported second-quarter operating earnings of $1.44 per share compared with $1.20 in the same year-ago period. Management reaffirmed its 2023 earnings guidance of $4.72 to $4.82, in line with our expectations. Management also reaffirmed its long-term outlook for 7%-9% earnings growth and dividend growth, which we expect the company to achieve the midpoint. Our narrow moat rating remains unchanged.

Strong execution of the company’s regulatory strategy, which seeks to work proactively with regulators to ensure timely recovery of rising costs and support of continued investments, allowed the company to offset the headwinds of rising operating and interest costs. The company’s usual busy regulatory calendar continues, with open cases in Indiana, West Virginia, and Kentucky. We expect strong execution resulting in constructive outcomes, consistent with previous rate outcomes in these states. We continue to view the company as one of the best-managed utilities operating under highly constructive regulation with a long runway of organic and inorganic growth opportunities.

Management is executing on its expectation to invest $14 billion to $15 billion in capital through 2027 that will support above-average peer earnings growth. The company has invested $1.2 billion and remains on track to invest $2.5 billion this year. While some of the company’s peers have had difficulty closing municipal water acquisitions, American Water continues to execute on identifying and closing acquisitions. The company has over $550 million of acquisitions under agreement and expects to close $400 million of those by year-end, in line with management’s and our expectations. The pipeline for future acquisitions remains very healthy, with 1.3 million customer connections.