There are few resources as vital or important to human life as water. However, as shifts in global climate change – and a growing worldwide population – spikes demand across the planet, access to this once ubiquitous compound is becoming ever more scarce.
Indeed, water has now taken on the mantle of an asset in its own right, with the first ever water futures market having been established on the Chicago Mercantile Exchange in 2020, making this most humble of liquids now akin to gold, oil, and other heavily traded commodities.
As water begins to play a more central role in the world’s financial ecosystem, it’s only natural that investors should look toward water-focused stocks as a way to benefit from its increasingly valuable status. Here, we’ll assess seven different water companies, to see what investment opportunities water-diversification brings to you and your portfolio.
Middlesex Water Company: Dividend Aristocrat
Having been incorporated as a water utility business as far back as 1897, Middlesex Water Company (MSEX) has a long heritage of being a trusted provider of full-range water and wastewater services to nearly half a million users in the states of Delaware and New Jersey.
As well as being a specialist in the municipal and industrial contract space, investors will also be pleased to know that MSEX is a Dividend Aristocrat with 49 years of consecutive dividend increases to its name.
At the latest earnings call, the firm’s Board of Directors announced a common dividend increase of 6.4%, bringing its quarterly pay-out to $0.29 per share, up from the $0.2725 dividend paid in July 2021.
Despite the fact that Middlesex is one year away from joining that most elite of clubs – i.e. the Dividend Kings – its low yield of 1.02% might not be the potential pull for shareholders given its high valuation right now.
Indeed, MSEX trades at a forward P/E ratio of 52, and its trailing twelve month price-to sales multiple is little better at 14. But a reliable dividend pay-out and continued yearly increases can’t be dismissed so easily, and the firm’s gross profit margin of nearly 50% makes this company a prime candidate for those seeking a solid and safe water stock to invest in.
Primo Water Corporation: Secular Tailwinds
Potable water suppliers such as Primo Water Corporation (PRMW) have enjoyed strong secular tailwinds the last few decades, as the public’s desire for pre-bottled water has been a major growth trend for the industry as a whole.
But that appetite seems to be receding now, as consumers, ever more aware of green issues, appear to be less willing to be seen using plastic containers due to their deleterious impact on the environment.
Primo, a company that provides hydration solutions straight to customers, isn’t behind the curve on this point, having plans already in place to exit the single-use North American bottled water space in the coming years.
Despite this impending loss of one of its leading business segments, PRMW’s revenue forecasts seem to be pretty healthy and suggest that the company can still be profitable going into the future.
Indeed, the plan to retire a product line that includes both multi-pack single-use water bottles and 1- and 2.5-gallon plastic jugs will not incur any significant material costs, and the firm believes that its expected adjusted EBITDA margin will in fact increase by roughly 100 basis points.
Xylem: Smart Monitoring Boosts Top Line
You would be forgiven for thinking that water companies hardly encapsulate the cutting-edge of technological sophistication, but Xylem (XYL), a water infrastructure firm, is turning that assumption on its head. The business is fairly young, having only been spun-off from the ITT Corporation in 2011, but since then it’s made a big impact on the sustainable water solutions market around the world.
The company’s motto of sorts is “Let’s solve water”, and one way it goes about this is by developing a growing digital ecosystem that protects against water wastage using high-end leak detection technologies across its already installed global base.
These smart monitoring products account for 35% of Xylem’s revenues at the present time, but the company believes these could rise to 50% by 2025. Its digital offerings enable XYL to charge higher prices for its services, and results in significantly increased recurring top-line sales for the business.
Xylem’s moat in the water infrastructure-space resides in the billions of dollars of savings its technology unlocks for customers.
The firm claims in its promotional literature that it can potentially decrease costs of $70B a year for its clients through its digital solutions, including reductions in wastewater pumping energy of more than 50%, and a 75% increase in workforce efficiency.
As more people connect with Xylem’s technological revolution in water management, the company’s fortunes will only compound. The firm’s financial performance recovered from a dip suffered at the beginning of the health crisis, and is now posting return on equity growth of almost 100% year-on-year.
American Water Works: High Margins, Stable Biz
Utility companies are rarely expected to be fast growing enterprises, but this doesn’t mean that in some circumstances that rule can’t be broken from time to time. Indeed, one water stock that does just that is American Water Works (AWK), a giant of a company with a market cap north of $30B at last count – the biggest water utility in the world, in fact – but one which still boasts a trailing twelve month EBITDA margin of 50%, a feat somewhat remarkable given that the sector median stands at just 35%.
And it’s not just AWK’s profit margins that are growing at an unusually fast rate either; the company, known to many investors for its safe dividend pay-out, is also growing this aspect of its business at a blistering pace too.
American Water Works’ dividend yield is about in-line with the industry average, but it’s its projected dividend growth that should get investors excited. The company expects a long-term dividend growth target of 7-10% at the high end, with a target dividend pay-out ratio of 55-60%. These aren’t unreasonable predictions; AWK’s dividend has grown by a CAGR of 10% the last ten years.
So, given that American Water Works has that perfect combination of high margins, a stable business, and an ever growing dividend, there’s very little stopping you from buying this quality stock today.
The York Water Company: 600+ Dividend Payouts
Not only is The York Water Company (YORW) the oldest investor-owned utility business in the United States, but it also holds the record for the longest unbroken dividend streak at 600 consecutive pay-outs.
However, the York, Pennsylvania-based water firm isn’t resting on its laurels; YORW just posted an EPS and revenue beat of $0.36 and $14.5M respectively, adding to these already impressive metrics a gross profit margin of an equally jaw-dropping 79%.
However, York’s share price has been a little erratic this year, gaining 3% over the course of 2021, but trading in a range between $53 at its highest and $40 at its lowest.
The stock currently changes hands at the present time only a couple dollars off its all-time 5-year high, so investors might be wary buying in right now.
The company has a good yield for a water utility at 1.60%, but, interested future shareholders would be wise to hold off entering the market at this point, and wait for a possible correction that would see the value of that dividend further increase.
Essential Utilities: 2% Dividend Yield
Despite the fact that most utility companies are generally insulated from certain market vagaries due to the indispensable nature of their business, this doesn’t always turn out to be entirely true however.
Essential Utilities (WTRG), for instance, suffered a sharp downturn at the beginning of the pandemic, losing nearly 50% of its value in just a matter of weeks.
Perhaps it was because WTRG isn’t simply a pure-play water stock, but that it also operates in the natural gas sector as well, that saw its share price fall so badly – and why its recovery has been so slow too? Whatever the reason, Essential has only just clawed its way back to where it was at the beginning of 2020, and, ironically, is looking a little overvalued.
That said, the company is well diversified geographically, providing services to roughly five million people spread over ten different states. The firm did miss both its top-line and bottom-line expectations for the third quarter 2021, and its net income dropped from $55.7M to $50.5M for the period.
However, its regulated natural gas segment and its regulated water segment both saw revenues rise in the low single digits – which might encourage some investors to plumb for the stock, especially given that its dividend yield right now sits at a very attractive 2.04%.
American States Water Company: 6% Top Line Growth
When it comes to capital appreciation in 2021, one of the big utility winners is the American States Water Company (AWK).
The firm grew in value by 30% since the start of the year, and the California-based water and electricity enterprise is now trading at a forward non-GAAP P/E multiple over 41 times.
Its price-to-book ratio of 5 isn’t too bad, but with year-on-year revenue growth of just 6%, the business is looking decidedly expensive.
Naturally, most investors who were already holding this stock will see its share price hike as a positive development, not least because it’s so atypical for a water utility of this kind.
However, there’s no doubt that prospective investors will wince at its current valuation, especially since its dividend yield will have suffered from this run-up too.
Even so, American States’ recent revenue beat and in-line earnings could be a signal that it really is a well-run business, though it wouldn’t be surprising if the market as a whole cuts AWR a wide berth still.
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