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Essential Utilities, Inc. (WTRG) – Wall Street’s Best Digest Daily Alert – 8/10/21

This utility beat both earnings and revenue estimates for the last quarter. The shares have a current annual dividend yield of 2.12%, paid quarterly.

This utility beat both earnings and revenue estimates for the last quarter. The shares have a current annual dividend yield of 2.12%, paid quarterly.

Essential Utilities, Inc. (WTRG)
From Conrad’s Utility Investor

Municipally owned entities currently control drinking and wastewater systems serving more than 80% of Americans. And as frequent safety concerns demonstrate—including a boiling water directive in the nation’s capital declared this month—the problem with the pipes is has become a crisis. Many areas are seeing the fallout from decades of underinvestment in systems, as pipes and mains wear out and cash strapped cities and towns simply don’t have the money to replace them.

Others are suffering from historic water shortages due to drought and human encroachment on watersheds and wetlands. Some are seeing the effects of population growth that’s simply outstripped available resources. In response, a growing number of states have stepped up efforts to encourage municipally owned systems to sell themselves to the small segment of America’s water and wastewater industry that is providing clean, safe water and is very much solvent.

That’s the handful of investor owned utility companies, of which Conservative Portfolio member Essential Utilities remains my favorite. Municipal buyouts benefit communities by turning over systems to financially stronger entities that can utilize scale benefits to cut costs, and improve service by quickly and methodically replacing failing infrastructure. They benefit acquiring utilities by increasing their scale at a low cost, therefore providing reliable fuel for earnings and dividend growth. And the more companies grow, the more profitable and able to add scale they become.

The key impediment to this virtuous cycle is politics. Mainly, despite their ongoing financial crunch and generally abysmal operating record, there’s still a powerful politically constituency for keeping drinking water and wastewater systems as public entities in many places. Such sentiment has held up and may eventually kill Essential’s bid to take over Pennsylvania’s DELCORA wastewater system over the past year.

My view, however, is it will also provide a big boost to takeover activity in states with “fair market legislation” where utilities are now focusing their efforts, for example Texas. And with investor owned utilities already making great strides replacing obsolete pipes and mains, they know exactly how to put any federal dollars to good use.

My favorite water stock remains Essential Utilities when it trades at 50 or less.

Roger Conrad, Conrad’s Utility Investor, ConradsUtilityInvestor.com, 888-960-2759, August 2021