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 March 12th, 2021 by Bob Ciura

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, then, 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 60 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 in our list 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: 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 (about 93%) under long-term contracts with inflation escalations.

Source: Investor Presentation

Acquisitions are a meaningful part of Algonquin’s future growth potential. Last year, Algonquin acquired ESSAL for $162 million, and also acquired 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. In August and November, Algonquin completed a solar and wind project in the U.S., adding a total of 245 MW capacity to its renewable energy portfolio.

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 2014 to 2019 EPS growth rate was 14.5% per year, based in USD.

Therefore, we estimate a 6% dividend growth rate versus an estimated EPS growth rate of 6.5% going forward. Algonquin is awarded an investment-grade S&P credit rating of BBB. The stock has an attractive current yield near 4%.

Water Stock #6: California Water Service Group (CWT)

California Water Service is the 3rd-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 fourth-quarter earnings results on February 25. Quarterly revenue of $189 million during the quarter, up 7% year-over-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. California Water Service generated earnings-per-share of $0.31 during the fourth quarter, up 29% for the quarter.

A breakdown of the company’s performance for the full year can be seen in the image below:

Source: Investor Presentation

Between 2009 and 2019, California Water Service grew 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.

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.

Water Stock #5: Pentair plc (PNR)

Until recently, Pentair was a diversified industrial conglomerate. The company spun off its Technical Solutions segment and now operates as a pure-play water solutions company that operates in 3 segments: Aquatic Systems, Filtration Solutions, and Flow Technologies.

Pentair has increased its dividend for more than four decades in a row, when adjusted for spin-offs, which makes Pentair a member of the Dividend Aristocrats. You can see the full list of all 65 Dividend Aristocrats here.

Pentair reported its fourth-quarter earnings results on January 28. Quarterly revenue of $800 million increased 5% year-over-year. Core sales, which excludes the impact of currency rate movements, acquisitions, and divestitures, rose 3% for the quarter. Pentair recorded earnings-per-share of $0.70 for the fourth quarter, which was up by 3% year over year, despite the pandemic and corresponding economic slowdown.

Source: Investor Presentation

Pentair was able to deliver earnings-per-share of $2.50 for fiscal 2020, up 5% from 2019. This was a strong performance, considering the impact of the pandemic. For fiscal 2021, Pentair is forecasting earnings-per-share in a range of $2.60 to $2.75.

Pentair’s dividend has grown consistently for decades, when adjusting for the spin-off of nVent. The payout ratio is not very high, which makes us believe that the dividend looks quite safe. Above-average operating efficiency is one of Pentair’s advantages over peers. The company employs a strategy called the Pentair Integrated Management System which has allowed its organizational structure to remain lean, and which has allowed the company to grow its already strong margins in the past.

Water Stock #4: A.O. Smith (AOS)

Next on the list is A.O. Smith, which like Pentair is a member of the Dividend Aristocrats list. A.O. Smith is a leading manufacturer of residential and commercial water heaters, boilers and water treatment products. A.O.Smith generates two-thirds of its sales in North America, and most of the rest in China. A.O.Smith has raised its dividend for 27 years in a row.

Source: Investor Presentation

A.O. Smith reported its fourth-quarter earnings results on January 28th. The company generated revenues of $830 million during the quarter, which represented an increase of 11% compared to the prior year’s quarter. A.O. Smith’s revenues were up 7% in North America, while revenue growth was even higher in the rest of the world, which primarily means China.

Earnings-per-share of $0.74 during the fourth quarter, which was up by a quite large 31% on a year over year basis, from $0.56 during the previous year’s fourth quarter. This can mostly be explained by the solid revenue performance, which allowed for some operating leverage and a meaningful increase in profitability.

A.O. Smith has also issued guidance for 2021. The company is forecasting earnings-per-share in a range of $2.40 and $2.50, which would reflect a meaningful earnings acceleration versus 2020.

Water Stock #3: Ecolab Inc. (ECL)

Ecolab is the industry leader and generates annual sales of roughly $15 billion. Ecolab operates three major business segments: Global Industrial, Global Institutional, and Global Energy, each of roughly equal size. The business is diversified in terms of operating segments, and also geography. Approximately 40% of the company’s sales took place outside North America in 2019.

In mid-February, Ecolab reported (2/16/21) financial results for the fourth quarter of fiscal 2020. Just like in the previous quarters, the pandemic greatly benefited Ecolab’s healthcare segment, but it weighed on the industrial segment and hurt the institutional segment. Overall, adjusted revenue decreased -6% and adjusted earnings-per-share decreased-15% in the fourth quarter.

Source: Investor Presentation

Ecolab has many positive growth catalysts. One of the company’s most important growth catalysts is acquisitions. In 2016, Ecolab acquired UltraClenz, a developer of electronic hand hygiene systems and dispensers. It also acquired Anios, a European healthcare and hygiene business. These deals helped Ecolab expand its scale, particularly in the international markets.

In 2017, Ecolab announced the acquisition of Georgia Pacific’s paper chemicals business. The purchase will help boost Ecolab’s growing paper business, which helps paper manufactures improve their efficiency, product quality, and profitability.

More recently, Ecolab closed on its $56 million purchase of U.K. based Holchem Group Limited. Holchem Group Limited is a supplier of hygiene and cleaning products and services for the foodservice and hospitality industries

You can see a more detailed analysis of Ecolab here.

Water Stock #2: American States Water (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 utilities business. The company’s services unit spans several US states. American States Water is a Dividend King, which means it has 50+ years of rising dividends.

Source: Investor Presentation

American States Water reported its fourth quarter earnings results on February 22nd, 2021. Fully diluted earnings-per-share increased from $0.45 in Q4 2019 to $0.54 in Q4 2020, while revenue for the fourth quarter grew by 9.9% to $124.2 million year-over-year. That said, consolidated adjusted diluted earnings per share increased by 20% per share, compared to last year’s same period. The company continues to weather the COVID-19 environment well due to its stable, mission-critical business model.

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 do not expect it to suffer from the current coronavirus outbreak or any related economic fallout as it provides essential services to consumers regardless of the state of the economy.

American States Water’s utility business 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.

American States Water 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: Consolidated Water Company (CWCO)

Consolidated Water Company was founded in 1973 as a private water utility in Grand Cayman. Since its founding, it has discovered a very nice niche for itself in the water business. The company uses a desalination process that helps provide water where naturally potable water is scarce or does not exist. Consolidated Water has since grown to more than $76 million in annual revenue.

Consolidated Water reported Q3 results on 11/17/20. Revenue increased 11.4% year-over-year to $17.7M, caused by increases of $3.3 million in the services segment and $0.2 million in the manufacturing segment. Retail revenue declined due to a 18% fall in water sales volumes stemming from a hit to the tourism industry during COVID-19.

Gross profit fell by 7.5% year-over-year to $6.2 million, while the company did experience a net loss of $1.4million and EPS also fell by 18.2% for the quarter. Cash and cash equivalents at quarter-end stood at $38.2 million.

Consolidated Water just recently began raising the payout again and we see that continuing. That should drive some investor confidence as well after so many years with a flat payout.We think that, given the company’s positioning as a water utility, they will be mostly immune to most of the fallout from the coronavirus pandemic.

Consolidated Water’s quality metrics have greatly improved in the past decade as it has increased its gross margins significantly, reduced leverage down to virtually nothing and as a result, produced enormous interest coverage ratios. We also see ample coverage for the dividend despite the projected increases as these trends work to boost earnings-per-share over time.

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.

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

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