Essential Utilities: A New Look for Aqua America

09/17/2020 5:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Barely a century ago, Americans enjoyed plentiful, clean and practically free drinking water. Now ensuring safe supplies and treating waste is an increasingly essential and rapidly growing $200 billion plus global market, suggests Roger Conrad, editor of Conrad's Utility Investor.

Among the surest beneficiaries: The handful of US investor owned utilities, headlined by Essential Utilities (WTRG), a holding in our conservative model portfolio.

Over the past 30 years, patiently reinvesting dividends in this company — previously known as Philadelphia Suburban and then Aqua America — has produced annual returns upwards of 14 percent. And the utility’s simple formula to produce those gains is arguably working better now than it did back in 1990.

That’s consolidating and upgrading to safe standards the literally thousands of independent water and wastewater treatment systems in the US, including the 75 percent or so controlled by increasingly cash-strapped municipalities.

Since 2015, Essential has added 53,000 customers by acquiring publicly owned systems. And by early next year, it will close purchases adding 202,000 more.

Fortunately, Essential’s ability to add systems has also never been greater. This year’s acquisition of Peoples Gas increased scale to an annual run rate of $1.5 billion revenue.

And it’s added a new source of reliable earnings growth, with the natural gas distribution utility’s rate base increasing 8 to 10 percent a year on regulator approved infrastructure upgrades alone.

Essential’s cost of debt capital is at an all-time low, with 30-year bonds yielding less than 3 percent to maturity. And last month the company raised $310 million by selling stock at the elevated valuation of nearly 30 times earnings.

Management also boosted the quarterly dividend 7 percent and reported largely Covid-19 proof Q2 earnings. That hasn’t deterred the predictable knee-jerk selling from some dilution-fearing investors. But the silver lining is Essential again sells for less than maximum recommended entry point of $45. Buy now — preferably through the DRIP.

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