American Water's Earnings Grow 5% and Its Dividend Increases 8%

American Water Works (AWK -0.69%), the largest and most geographically diverse publicly traded U.S. water and wastewater utility, reported its first-quarter 2023 results on Wednesday after the closing bell.

Here's how the quarter worked out for American Water and its investors.

American Water's key numbers 

Data source: American Water Works. GAAP = generally accepted accounting principles. YOY = year over year.

The company's earnings growth was primarily driven by higher rates that went into effect in several of the states in which it has regulated businesses, "offset somewhat by impacts from inflationary pressures on production costs and higher interest costs since mid-2022," it said in the release.

Wall Street was looking for EPS of $0.92 on revenue of $899 million. So the company slightly missed the profit expectation and exceeded the top-line one.

Acquisition activity

In 2023, American Water plans to invest a total of about $2.9 billion, including approximately $400 million for acquisitions, which is 19% more money than it spent on acquisitions last year.

In the first quarter of 2023, the company closed on five acquisitions across two states. These deals, which were for a combined $3 million, added about 1,400 new customer connections. In addition, at the end of the quarter, it had 27 acquisitions across nine states under agreement. These acquisitions -- which total about $481 million -- will add approximately 48,200 customer connections. The company has about 1.3 million total connections, including those in the pipeline. 

The acquisitions under agreement include a particularly large one in Pennsylvania: the wastewater system assets of the Philadelphia suburb of Towamencin Township for $104 million. This deal will add about 6,300 customer connections and is expected to close in mid-2024. Moreover, the company started the second quarter with the announcement of another sizable acquisition under agreement -- the wastewater treatment plant assets of Granite City, Illinois, for $83 million.

For context, in 2022, American closed on 26 acquisitions across 7 states for a total price of $335 million. These acquisitions added about 70,000 customer connections.

Investors get an 8% dividend raise

On April 26, company declared a quarterly cash dividend of $0.7075 per share of common stock, an 8% increase over the prior quarterly dividend. The dividend is payable on June 1 to shareholders of record as of May 9. For context, last year, American Water raised its dividend 8.7%.

Shares were yielding about 1.8% as of the market close on Wednesday.

What the CEO had to say 

Here's most of what CEO Susan Hardwick had to say in the earnings release: 

We're off to a great start to the year. Our investments in infrastructure and our success signing new purchase agreements for regulated acquisitions has set the stage well for achieving our expected growth in 2023 and beyond.

We also successfully executed the 2023 planned equity issuance in March. In total $1.7 billion was issued, reflecting an upsized offering made possible by very strong demand for our securities. ... With this action and solid first quarter results, we are on track to meet our 2023 objectives.

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 (2023 to 2027 period) annual weather-normalized EPS and dividend growth targets of 7% to 9%. 

An attractive stock for the long term

American Water stock deserves a spot on most long-term investors' watch lists. Reiterating what I wrote after American Water's Q4 2022 results were released, "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."