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3 Things American Water Works' Management Is Telling Investors to Expect in 2017

Recently reporting its fourth-quarter earnings, the management of American Water Works (NYSE: AWK), an industry leader among water utility stocks, also provided guidance for the year to come.

Without consideration of President Donald Trump's apparent interest in rebuilding America's infrastructure -- something that could be a boon to utilities like American Water Works -- the company is optimistic that fiscal 2017 will find the company swimming in good fortune. Let's take a look at three specific things we can expect. 

A rising tide of earnings

Although it's convenient to read short summaries of earnings reports, savvy investors recognize the importance of digging a little further. Take the company's earnings from 2016, for example. On a GAAP basis, diluted earnings per share totaled $2.62 in fiscal 2016 -- a 0.8% decrease from the prior year. Looking below the surface, though, we find that the company -- removing the impact of a settled lawsuit -- reported adjusted diluted EPS of $2.84, representing a 7.6% increase over the $2.62 it reported in fiscal 2015.

Image source: Getty Images.

Addressing the year ahead, management is guiding earnings to total $2.98 to $3.08 per diluted share. Should the company achieve the midpoint of this range, it would represent a 6.7% improvement over the adjusted figure from fiscal 2016. In addition to organic growth, management attributes this forecasted growth to come from its continuous pursuit of strategic acquisitions. In fiscal 2017, the company expects to spend between $120 million to $240 million for acquisitions in its regulated businesses segment to expand its water and wastewater customer base.

Running an even tighter ship

Unlike other businesses, which can raise prices as they see fit, American Water Works recognizes the vast majority of its revenue -- 86.9% in fiscal 2016 -- from its regulated businesses segment. Consequently, the company relies on improving its efficiency to grow the bottom line. To this end, the company gauges its success through the use of a specific metric: the operations and maintenance (O&M) efficiency ratio. Basically a modified operating margin, the O&M efficiency ratio is the company's regulated O&M expenses divided by regulated operating revenues.

In fiscal 2016, the company reported an O&M efficiency ratio of 34.9% -- improvement over the 35.9% and 36.7% it reported in fiscal years 2015 and 2014, respectively. According to comments in the company's 10-K, the improvement in 2016 over 2015 was "primarily attributable to an increase in revenue." For fiscal 2017, management expects the O&M efficiency ratio to improve even further. Unlike the EPS forecast, management didn't provide a specific range; however, the expected improvement will bring the company closer to achieving its 2021 target of 32.5%.

Flooding investors with rewards

Utility stocks are certainly not the sexiest of investments. They represent neither disrupting technologies nor breakthrough medical treatments. On the other hand, they provide the comfort of a steady -- hopefully increasing -- dividend.

American Water Works is no different. In fiscal 2016, the company's annualized dividend totaled $1.47 per share, and management expects it to rise even more in fiscal 2017. From fiscal 2015 through fiscal 2021, the company expects EPS to grow at a compound annual growth rate of 7% to 10%. Regarding the dividend in fiscal 2017, management expects an increase in line with the forecasted earnings growth rate.

The company is not shy about sharing its earnest approach to rewarding shareholders. On the company's recent conference call, Linda Sullivan, American Water Works' CFO, asserted, "We also continue to be a leader in dividend growth, compared to the Dow Jones utility average, the UTY and our water utility peers." It's important for both potential and current investors to recognize that the company's commitment to shareholders doesn't come at the risk of the company's financial position.

AWK Payout Ratio (Annual) data by YCharts.

American Water Works has recognized an approximate 16% drop in its payout ratio compared to its peers, American States Water Company, California Water Service Group, and Aqua America, from fiscal years 2012 through 2015 -- not all companies have reported fiscal 2016 figures yet.

Investor takeaway

Following a strong 2016, the management of American Water Works seems optimistic that the coming year will also be flooded with success -- success that is not only predicted in the short term, but a step in the long-term vision of continued prosperity. And for investors considering wetting their whistles with a water utility stock, American Water Works certainly represents a compelling consideration.

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Scott Levine has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.