Through the first seven weeks of 2020, the S&P 500 Index rose 3.3%.
Unsurprisingly, one of the leading sectors during that time was technology, gaining 8.2%.
But the top-performing sector is one that many people dismiss in bull markets – utilities...
Utilities are considered a safe-haven sector. No matter what's going on in the broader economy, people will always need electricity, gas, and water. And this usually translates to steady returns for utility companies.
This stability makes utilities one of the most sought-after sectors in economic downturns. In fact, utilities have been one of the top performers in five of the last six bear markets.
But today, they're outperforming at the tail end of this decades-long bull market, up 8.3% so far in 2020.
Only time will tell if utilities outperform again in the next bear market. But today, we're highlighting a utility that could produce steady gains for decades...
Essential Utilities (NYSE: WTRG) owns and operates regulated water companies.
That means that Essential Utilities owns the infrastructure – including treatment plants and pipes – and then it charges customers for water.
It's the second-largest publicly traded water utility in the U.S., serving more than 3 million people.
The price that Essential Utilities charges is determined by local government regulators. They estimate the cost of delivering water and allow Essential Utilities a reasonable return on its investment. Given that its utilities vary across states, there's no single number to capture Essential Utilities' exact return, but typically a water utility gets roughly 10%.
Additionally, when Essential Utilities invests in more infrastructure or expansion, most states allow it to add revenue surcharges to pay for (and profit from) those investments.
In all, this makes for a steady, profitable business.
Essential Utilities does have other sources of income – like providing water to industrial companies and performing sewer-line repairs for households. It also performs services for other municipal systems – but that accounts for less than 0.5% of sales.
The bulk of its business is regulated water utilities, along with a newly acquired natural gas utility. (To reflect this new gas business, the company recently changed its name from Aqua America to Essential Utilities and changed its ticker symbol from WTR to WTRG.)
The company recorded about $870 million in revenue in the last 12 months. The company made $586 million in earnings before interest, taxes, depreciation, and amortization ("EBITDA") off that amount for a 70% margin.
Its revenues will continue to grow as it buys up more water operators. And organic revenue is still growing steadily, too.
But the growth won't stop anytime soon – the company is currently pursuing deals that would add an additional 415,000 water customers.
That follows Essential Utilities' recent $4.3 billion acquisition of Peoples, a Pittsburgh-based natural gas utility. The Peoples acquisition will add 740,000 gas customers throughout West Virginia, Pennsylvania, and Kentucky.
And Essential Utilities made an interesting choice of financing. Rather than borrow to buy Peoples, it issued new shares of equity. Most companies avoid issuing shares because it dilutes current shareholders and typically lowers the share price.
Essential Utilities shares initially fell upon the announcement, but they have since rebounded.
And the reasoning behind this move was sound.
By not issuing debt, Essential Utilities can maintain its strong balance sheet. This means the company can keep borrowing at good rates in the future. That's a critical piece of the company's longtime growth strategy... When tempting opportunities present themselves, the company snaps up small municipal operators looking to outsource their water systems to a private company.
In the three years from 2016 to 2018, the company made 32 acquisitions, adding about 48,000 customers.
Last year was no different.
It made eight acquisitions – which added about 13,000 water and wastewater customers.
To buy these water systems when the opportunity strikes, Essential Utilities needs to be able to borrow money readily. So that's why it's so valuable that its big natural gas acquisition didn't overload the company with debt.
Essential Utilities also qualifies for the rare label of a "Dividend Aristocrat." These are companies that have raised their dividend payout each and every year for more than 25 years.
The company has paid a dividend every year for the last 75 years. And it has raised its payout 29 times in the last 28 years.
WTRG shares currently yield about 1.8%. That's slightly more than the S&P 500.
Shares themselves have a beta of 0.4, which means that historically they're about half as volatile as the S&P 500 (which has a beta of 1). That means Essential Utilities offers the same yield as the S&P 500 for half the volatility.
Essential Utilities' steady business model and consistent dividend payout have been great for shares.
The stock has nearly doubled over the past five years, and it recently hit an all-time high. More importantly, WTRG shares have been relatively immune to large drawdowns – making them a safe long-term investment.
Utilities stocks are one of the top sectors right now, and they should outperform again in an economic downturn. Essential Utilities is a leading company in an industry that there will always be demand for – water services. It's less volatile than the overall market, and sports a higher dividend yield.
Sometimes investing is simple.