We recently initiated coverage on
Essential Utilities
WTRG
. This water utility with its steady capital investment, strategic acquisitions, customer additions and organic growth is expected to be a consistent performer in its industry over the long run.
This Zacks Rank #3 (Hold) stock delivered an average four-quarter earnings surprise of 4.6%. Its long-term (three to five years) earnings growth is currently pegged at 6.34%. Moreover, its current dividend yield of 2.31% is better than its
industry
average of 1.6%.
Tailwinds
Massive infrastructural investments are required to upgrade and maintain the water utilities, as old and soiled water pipelines are quickly nearing their effective service life. Essential Utilities has plans to make the necessary investments to strengthen its natural gas infrastructure. In 2021, the company aims to invest $550 million in the water segment and $450 million in the natural gas segment. The company plans to invest $3 billion through 2023 to fortify operations and efficiently serve the expanding customer base.
During the five-year period ended Dec 31, 2020, Essential Utilities expanded utility operations by completing 46 acquisitions of water or wastewater utilities and other growth ventures. During 2020, the company closed four acquisitions, which added 12,184 new customers. The acquisition of People Gas in 2020 has helped the company to diversify its operation and venture into the natural gas business. Another water utility
American Water Works
AWK
has successfully acquired 62 water utilities and 44 wastewater utilities since 2015, which added 211,000 customers to its customer base. In 2020, it successfully closed 23 acquisitions by adding 37,800 customers and expanding operations in the United States. Water utility,
Global Water Resources
GWRS
is also making acquisitions and the necessary investments to expand as well as strengthen operations, and upgrade the acquired assets for providing efficient services to customers.
Rate hikes application and approval from the commission help the company to recoup expenditure and fund future capital projects. Rate cases completed in 2020 increased its top line by $21 million on an annual basis. Cases completed in 2021 are expected to increase annual revenues by $8.5 million. The pending water rates, on completion, are expected to further increase annual revenues by $1.8 million. Rate hikes completed in the natural gas segment increased its annual revenues by $1 million in 2020. Essential Utilities does not have any pending natural gas rates cases.
Headwind
Water utilities always run the risk of contamination of water supplied to its customers, despite implementing the best safety measures.
Price Performance
Shares of Essential Utilities have outperformed the industry in the past six months.
Zacks Rank and a Key Pick
Essential Utilities currently has a Zacks Rank #3 (Hold). A better-ranked stock in the same industry is
California Water Service Group
CWT
, currently having a Zacks Rank of 2 (Buy).
California Water Service’s current dividend yield is 1.7%, which is better than its industry’s average yield. The Zacks Consensus Estimate for earnings per share of California Water Service for 2021 and 2022 has moved up 3.5% and 6.8%, respectively, in the past 60 days.
You can see
the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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