The 7 Best Water Stocks: How To Profit From One Of Life's Necessities - Sure Dividend

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The 7 Best Water Stocks: How To Profit From One Of Life’s Necessities


Updated on June 8th, 2021 by Nikolaos Sismanis

Water is one of the basic necessities of human life. Life as we know it cannot exist without water. For this simple reason, water may be the most valuable commodity on Earth.

It is only natural for investors to consider purchasing shares of the companies involved in water. There are many different companies that can give investors exposure to the water business, such as water utilities. Some other companies are engaged in water purification.

In all, we have compiled a list of over 50 stocks that are in the business of water. The list was derived from five of the top water industry exchange-traded funds:

You can download a spreadsheet with all water stocks (along with metrics that matter like price-to-earnings ratios and dividend yields) by clicking on the link below:

 

In addition to the Excel spreadsheet above, this article covers our top 7 water stocks today, that we cover in the Sure Analysis Research Database.

This article will discuss the top 7 water stocks ranked by a qualitative combination of their business model strength, current dividend yield, and future dividend growth potential.

Table of Contents

Water Stock #7: Global Water Resources, Inc. (GWRS)

Global Water Resources is particularly appealing because it is a monthly dividend stock. In fact, it is the only American water company that pays dividends on a monthly basis. Water stocks are often praised for their very stable and secure cash flows. Adding the element of receiving dividends on a monthly basis further adds to investor certainty and total return predictability.

The company owns, operates, and manages regulated water, wastewater, and recycled water utilities primarily in metropolitan Phoenix, Arizona. Because Arizona’s water market is fragmented, combined with the fact it is currently the U.S.’s fastest state in terms of homeownership growth state, Global Water is benefiting from great organic growth prospects.

Its regulated annual revenues have been growing rapidly over the years. Due to water being a necessary commodity whose consumption is mostly uncorrelated to the events affecting the overall economy, revenues should remain resilient during a potential recession, as was the case during the Great Recession.

Source: Annual Report

The company utilized exotic financial engineering to support its dividend payments in the past while it was reinvesting the majority of its profits towards expanding its operational network and acquiring its smaller competitors.

However, with EPS (earnings per share) likely soon to catch up to its underlying dividend, as well as the company increasing its dividend annually since initiating it 6 years ago (even if such increases are marginal), investors should consider Global Water’s monthly dividend relatively reliable.

Water Stock #6: Algonquin Power & Utilities (AQN)

Algonquin Power & Utilities Corp. trades on both the Toronto Stock Exchange and New York Stock Exchange under the ticker AQN. The renewable power and utility company was founded in 1988. The company has increased its dividend every year since 2011.

The three parts of its business are regulated utilities (natural gas, electric, and water), non-regulated renewables (wind, solar, hydro, and thermal), and global infrastructure. Algonquin serves more than 1 million connections, primarily in the U.S. and Canada. It also has renewable and clean energy facilities that are largely (more than 90%) under long-term contracts with inflation escalations embedded.

Source: Investor Presentation

Acquisitions are a meaningful part of Algonquin’s future growth potential. Last year, Algonquin acquired ESSAL for $162 million, as well as Ascendant. ESSAL is a Chilean water utility that added ~230,000 connections. Ascendant’s major subsidiary is BELCO, the only electric utility in Bermuda. BELCO is a regulated utility and added ~36,000 connections.

Q1-2021 marked the first full quarter with contributions from both ESSAL and BELCO, resulting in adjusted EBITDA growth of 17% to $282.9 million. The company’s Board of Directors also approved a 10% dividend increase, maintaining Algonuin’s excellent track record of shareholder returns.

Historically, Algonquin’s earnings growth has been volatile. However, they have become more stabilized in the past few years, as the company has increased its scale with a more diversified asset base. Assets now consist largely of regulated utilities with predictable returns or renewable facilities with long-term contracts that generate stable cash flow. Specifically, its 2015 to 2020 annual EPS growth rate was 14.2% based on USD terms.

The company remains one of Canada’s fastest-growing and reliable investments among utilities, likely to keep delivering robust returns both in terms of capital gains and dividend income.

Water Stock #5: Essential Utilities, Inc. (WTRG)

Essential Utilities is the second-largest publicly traded water utility in the U.S., serving approximately 5 million customers across 10 states. The company has raised its dividend for 29 consecutive years, which qualifies it to be a member of the Dividend Champions list.

The company has paid a quarterly dividend for 76 consecutive years. In 2020, which was a year that proved itself to be a challenging one to numerous industries and businesses, Essential Utilities was one of the few that was mostly unaffected from the adverse shocks of COVID-19, with total water usage was up 0.8% YoY.

Source: Investor Presentation

The company has compounded its adjusted earnings-per-share at a CAGR (compound annual growth rate) of 7.4% over the last decade. We expect the company to keep expanding its bottom line annually at around 7%, on average. Growth will be powered by its recent major acquisition of Peoples, organic growth, and regulated annual rate hikes.

To highlight the company’s focus on growth, Essential Utilities has closed nearly 200 acquisitions and ventures in the last 10 years, buying its smaller competitors and integrating them into its vast network. Amid a very healthy payout ratio of around 60%, we also expect the company to keep growing its dividend annually at around 7%, similar to its current 5-year average.

Water Stock #4: The York Water Company (YORW)

In the fourth position of our best water stocks is a company with two very unique characteristics. Firstly, The York Water Company is the oldest investor-owned water utility in the United States, having functioned continuously since 1816.

Secondly, and more impressively, the company features one of the most impressive dividend histories ever recorded. The York Water showcases a spectacular record of over 200 years of uninterrupted dividend payments to shareholders, including 24 years of consecutive dividend annual increases as of today.

Source: Annual Report

Due to the company’s very mature operations and predictable business model, York Water has seen a very steady and gradual growth in its EPS, which features a 10-year CAGR of 6.7%. Future growth catalysts include a growing number of customers and distribution facilities, as well as acquisitions of wastewater systems.

For context, during 2020, customers grew by 1.8% to 72,681 (population served of more than 202,000). Consequently, we expect the company’s excellent dividend-per-share growth record to continue at an annualized rate of around 4% over the next five years. This would be in-line with its latest increase and also in-line with the current trend of an improving payout ratio (currently 59%).

The company’s cash flows are unlikely to be affected by any potential recession, as was the case during the Great Recession and the COVID-19 pandemic. The company operates within an exclusive franchised territory that is substantially free from direct competition with other public utilities, municipalities, and other entities, adding another layer of safety to its business model.

Water Stock #3: California Water Service Group (CWT)

California Water Service is the 4th-largest publicly-owned water utility in the United States. The company has six subsidiaries that provide water to about 2 million people, mainly in California, with some additional operations in Washington, New Mexico, and Hawaii.

California Water Service has increased its dividend for more than 50 consecutive years, which makes the company a Dividend King. You can see a full list of all 31 Dividend Kings here.

California Water Service reported its first-quarter earnings results on April 28th. Quarterly revenues were $147.7 million, 17.6% versus the comparable period last year. Revenue growth came from rate increases that were negotiated throughout the last year and that were justified by higher water costs for the company.

The company’s past and estimated regulated rate base increases can be seen in the graph below:

 

Source: Investor Presentation

Over the past decade, California Water Service has grown its earnings-per-share at an average annual rate of 4%, which is a decent pace of earnings growth for a utility. We believe that California Water Service’s earnings-per-share will continue to grow at a mid-single digits rate going forward, as it did in the past.

Earnings growth, in the long run, should be achievable thanks to the rate hikes that are regularly approved by relevant authorities/regulators, as well as organic growth such as population growth and increased water consumption.

California Water Service has paid out between 50% and 70% of its net profits throughout most of the last decade. Overall, the dividend payout ratio has declined slightly over that time frame, as the company’s dividend growth rate was lower than its earnings-per-share growth rate.

The predictable nature of the company’s earnings, combined with a payout ratio that is not overly high, means that the dividend looks very safe. Its 54-year record of annual dividend increases is certainly a testament to that.

Water Stock #2: American States Water Company (AWR)

American States Water is a utility company with two business units: Utilities (primarily water, some electricity) and Services (wastewater services on several US military bases). American States Water is based in California, where it operates its utility business. The company’s services unit spans several US states. American States Water is also a Dividend King, having raised its dividend for 66 consecutive years.

The company reported its first-quarter earnings results on May 3rd, 2021. Fully diluted earnings-per-share increased from $0.38 in Q1 2020 to $0.52 in Q1 2021, while revenue for the first quarter grew by 7.3% to $117.06 million year-over-year. Consolidated adjusted diluted earnings per share increased by 20.9% per share, compared to last year’s quarter.

Between 2011 and 2020, American States Water grew its earnings-per-share at a rate of 7.6% annually. The company managed to increase its profitability even during the last financial crisis, which shows that American States Water’s profitability is not cyclical. We expect the company to retain its robust performance regardless of the state of the economy.

Therefore, it should be able to maintain and extend its prolonged dividend growth, which features a 10-year CAGR of around 9.4%.

 

Source: Q1 Presentation

American States Water’s utility revenues will most likely continue to grow at a slow pace, as regulators will allow the company to increase its rates over time in order to encourage spending on growth and maintenance projects. The company is building out its services business by getting contracts for wastewater services on additional US military bases.

The contracts for wastewater services on US military bases span a 50-year period each, so getting one such contract provides for a decades-long and very safe revenue stream.

The company has increased its dividend every year for 66 years in a row, which can only be described as a very long and successful dividend growth track record.

Water Stock #1: American Water Works Company, Inc. (AWK)

Closing the list of our top water stocks is American Water Works. While the company may not feature the prolonged dividend growth records that its peers discussed earlier, American Water is the largest and most geographically diverse, publicly traded water and wastewater utility company in the United States, as measured by both operating revenues and population served.

The company provides drinking water, wastewater, and other related services to over 15 million people in 46 states. Its regulated business includes 53,000 miles of pipe, 609 water treatment plants, 150 wastewater facilities, 110 wells, and 75 dams.

Source: Investor Presentation

American Water Works has a highly stable and robust track record both in terms of its profitability and its dividend payments. The company enjoys an extremely resilient business model due to water being a necessity both for residential and industrial usage, as well as a mission-critical asset for the military. As a result, American Water has been able to grow its network and operations with limited risks.

Instead of predicting the company’s future earnings growth, management has already shared its outlook, expecting to grow EPS by approximately 7%-10% annually over the next few years, powered by 5%-7% from regulated investment capex, 1.5%-2.5% from regulated acquisitions, and ~1% market-based businesses. EPS growth includes rate base increases which the company estimates to grow by a CAGR of 7%-8% going forward.

Consequently, we expect solid dividend increases moving forward at around 9% annually, easily supported by the company’s underlying profitability. American Water Works currently features a healthy payout ratio at around 57%. Due to its vastly diversified operations and predictable future cash flows, it should continue growing its earnings and dividend income for its investors for decades to come.

Final Thoughts

Water could be one of the biggest investing themes over the next several decades. An increasing global population is only going to cause demand for water to rise in the future. And, given the fact that water is a necessity of human life, demand for water should hold up extremely well, even during the worst recessions. Therefore, investors with a longer time horizon such as Millennials should consider water stocks.

These factors make water stocks appealing for risk-averse investors looking for stability from their stock investments. Not all the water stocks on this list receive buy recommendations at this time, as some appear to be overvalued today. But all the water stocks on this list pay dividends and are likely to increase their dividends for many years in the future.

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