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Essential Utilities (WTRG) to Gain From Investment, Buyouts

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Essential Utilities (WTRG - Free Report) has been gaining from steady capital investment, strategic acquisitions, customer additions, debt management and organic growth. It is expected to be a consistent performer in its industry over the long run.

Essential Utilities— which currently has a Zacks Rank #3 (Hold)—delivered an average four-quarter earnings surprise of 1.45%.  Its long-term (three to five years) earnings growth is currently pegged at 6.22%. Moreover, its current dividend yield of 2.2% is better than its industry average of 1.5%.

Tailwinds

Massive infrastructural investments are required to upgrade and maintain water utilities as old and soiled water pipelines are quickly nearing their effective service lives. Essential Utilities has plans to make necessary investments to strengthen its natural gas infrastructure. The company plans to invest $3 billion through 2023 to fortify operations and efficiently serve the expanding customer base.

Essential Utilities completed the acquisition of Common Water on Aug 2, 2021, and Bourbonnais, which added 980 and 6,450 customers, respectively. It expects the water and wastewater customer base to increase 2-3% year over year in 2021 through acquisitions along with organic means. Gas customer volumes are expected to remain stable in 2021.

Efficient debt management by WTRG has resulted in a decrease in the weighted average cost of fixed-rate long-term debt. Rating agencies have provided strong credit ratings to the company. Total debt to capital was 52.7% in thethird quarter of 2021, down 210 basis points from 54.8% at the end of the fourth quarter of 2020. Its times interest earned ratio at the third-quarterend was 3.0, improving sequentially from the 2020-end level of 2.4. This indicates that it has enough liquidity to meet debt obligations without any difficulty and its stable times interest earned ratio is reassuring for investors.

Headwinds

Despite implementing the best safety measures, water utilities always run the risk of contamination of water supplied to customers. Even the implementation of strict regulations by federal and state environmental laws can significantly increase the operating costs for the company.

Weather also has a direct impact on water and gas consumption and the fluctuation of weather will adversely impact demand and lower revenues.

Price Performance

In the past six months, shares of Essential Utilities have rallied 4.2%, outperforming the industry’s 0.7% growth.

Zacks Investment ResearchImage Source: Zacks Investment Research

Zacks Rank and Key Picks

Some better-ranked stocks from the same sector are American States Water (AWR - Free Report) , Atmos Energy (ATO - Free Report) and IDACORP Inc.(IDA - Free Report) , each carrying a Zacks Rank of 2 (Buy).

The Zacks Consensus Estimate for 2022 earnings per share of American States Water, Atmos Energy and IDACORP has moved up 2.71%, 0.34% and 1.01%, respectively, in the past 60 days.

American States Water, Atmos Energy and IDACORP delivered an average earnings surprise of 5.02%, 6.46%, and 5.18%, respectively, in the last four quarters.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.