No sector comes close to the resiliency of regulated water utilities. And with the stock market and economy facing a combination of war, pestilence and the highest inflation in 40 years, it’s a great time to pick up shares of the best-in-class Essential Utilities (WTRG), a holding in our conservative portfolio, notes Roger Conrad, editor of Conrad's Utility Investor.
Essential rarely makes the list of top annual coverage universe performers. But in the 30 or so years I’ve tracked its fortunes and owned shares, the company has never lost more than few percentage points in a given year, while producing a compound annual return of 14 percent — a 50-fold gain with dividends reinvested.
Essential’s growth formula is basically the same as when I first met its chief architect and then CEO Nick DeBenedictis, a former Pennsylvania regulator who saw an opportunity to consolidate the highly fragmented US water utility sector.
The company’s revenue and EBITDA are now about 20-fold larger. Earnings have increased by almost 10-fold and quarterly dividends are roughly 7 times higher.
The utility, however, is still relentlessly adding customers with a combination of service territory growth and acquisitions, boosting returns by increasing efficiencies of scale. The larger it’s grown, the easier to profitably absorb new systems. And that’s enabled ever-larger purchases, with inflation-battered municipally owned water and wastewater systems now the key targets.
Essential has M&A in the works now to add more than 425,000 new customers, following this month’s purchase of Lower Makefield Township assets in Pennsylvania.
Management is hopeful it will settle litigation with Delaware County to close the purchase of the DELCORA wastewater system this year. But even if that deal remains stalled or ultimately fails, there’s plenty in the pipeline to fuel the company’s 5 to 7 percent annual target for earnings and dividend growth.
During the Q4 earnings and guidance call, CEO Chris Franklin was asked if there was any plan to shop the company’s Pennsylvania natural gas utility assets to fund more water acquisitions. That’s possible, but in the meantime Essential has an asset gaining value as it grows rate base 8 to 10 percent a year. Buy at $50 or lower.
