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Water Stocks

Water stocks are a unique class of utility equities. Water and wastewater treatment and service is often a municipal function. But in some cases, publicly traded utilities operate and maintain water and wastewater plants. Also, many companies are providing pumps, meters, piping, etc., to the utilities. The industry is enormous.

Besides direct human consumption, water is used in the food and beverage industry. It is also needed for semiconductor plants, the oil and gas industry, data servers and storage farms, and industrial processes. Although the earth contains an enormous amount of water, most of it is in the oceans requiring desalination and making it expensive. Approximately 2% of the total water is in the polar ice caps, leaving roughly 1% usable for the human population. Furthermore, the global population is rising, creating more demand. Record-setting drought in many places is making water scarce. Consequently, water stocks generate excellent cash flows and increase dividend payments.

This article discusses several publicly traded water stocks, including utilities and industrial companies.

Water Stocks
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Water Stocks with Long Dividend Streaks

A few water stocks have long dividend payment streaks, and some have lengthy dividend increase records.

American States Water Company (AWR)

American States Water Company (AWR) was founded in 1929 in California. The company operates through three subsidiaries: Golden State Water, Bear Valley Electric Service, and American States Utility Services. The utility serves more than 262,000 water connection customers and 24,000 electricity connection customers in California. The utility also serves eleven military bases through privatization contracts.

Total revenue was around $499 million in 2021 and $485 million in the past twelve months. 

America States Water has the distinction of the longest dividend growth streak of any company at 68 years, making the stock a Dividend King. Also, it has paid a dividend since 1931. According to Portfolio Insight*, the dividend rate is $1.59 per share, giving a dividend yield of approximately 1.91%. This percentage is below the 5-year average dividend yield of 1.66%. In addition, the dividend growth rate has been 8.9% in the past 5-years and 9.79% in the past decade.

Portfolio Insight - Dividend Growth AWR
Source: Portfolio Insight*

The dividend safety is excellent because, as a utility, American States Water has consistent and repeatable earnings and cash flow. The payout ratio is about 57%. Operating cash flow (OCF) was $131.5 million in the last twelve months and more than covers the dividend requirement of $53.94 million. The utility has an A+/A3 upper-medium investment-grade credit rating adding to the safety.

American States Water is trading at a forward price-to-earnings (P/E) ratio of around 33.6X, within its average range in the ten years but below its range in the past 5-years. However, the stock is rarely undervalued, and now may be an excellent time to acquire shares.

Related Article About American States Water on Dividend Power

California Water Service Group (CWT)

California Water Service Group (CWT) was founded in 1926 in San Jose, California. The water utility is America’s third largest water and wastewater treatment company. The firm operates through five geographic subsidiaries: California Water Service (Cal Water), Hawaii Water Service (Hawaii Water), New Mexico Water Service (New Mexico Water), Washington Water Service (Washington Water), and Texas Water Service (Texas Water).

The utility has about 484,500 customer connections in California, 6,200 customer connections in Hawaii, 36,400 in Washington, 8,600 in New Mexico, and 2,500 in Texas. California Water serves about two million people.

Total revenue was around $791 million in 2021 and $809 million in the past twelve months. 

California Water is another Dividend King with 55 years of dividend growth. The forward dividend rate is $1.00 per share, giving a dividend yield of only 1.80%. The company increases the dividend by about 4% to 5% per year.

Portfolio Insight - Dividend Growth CWT
Source: Portfolio Insight*

The dividend safety metrics are solid, with a payout ratio of ~47%. Operating cash flow of $254 million covers the dividend requirement of about $51 million. California Water Service has an A+ upper-medium investment grade credit rating providing confidence in the dividend.

The stock is trading at a forward P/E ratio of ~30.5X, below its 5-year range but within its 10-year span. Like most water utilities, California Water Service is rarely undervalued, and thus it may be an opportune time to purchase shares or add to a position.

SJW Group (SJW)

SJW Group (SJW) is another water utility based in California. The original San Jose Water Company was founded in 1866. SJW Group was formed in 1985 as SJW Corp and changed its name to SJW Group in 2016. The utility operates through four subsidiaries in four states: San Jose Water Company, Connecticut Water Company, Maine Water Company, and SJWTX in Texas. The utility serves about one million people in the San Jose area, 360,000 customers in Connecticut, 80,000 in Maine, and 59,000 in Texas. 

Total revenue was around $574 million in 2021 and $580 million in the past twelve months. 

SJW Group is yet another Dividend King with 55 years of increases. The dividend yield is higher than its peers at 2.42%, above the 5-year average of 1.95%. The dividend growth rate is higher than its peer, too, at about 11%.

Portfolio Insight - Dividend Yield History SJW
Source: Portfolio Insight*

However, the dividend safety metrics for the company are not as good as its peers. The payout ratio is about 76%, still acceptable for a utility but on the higher side. Operating cash flow of ~$147 million covers the dividend cash requirement of roughly $42 million in the preceding twelve months.

SJW Group’s stock is trading at about 25.4X consensus 2022 earnings. This value is below the 5-year range but within the ten-year span. Hence, investors may want to research this water stock further.

York Water Company (YORW)

York Water Company (YORW) is more than 200 years old and was incorporated in 1816. The utility serves three counties and 51 municipalities in south-central Pennsylvania. It provides water and wastewater service to over 200,000 people through ~72,000 connections.

Total revenue was around $55 million in 2021 and $57 million in the past twelve months.

York Water is famous as the company with the longest dividend payment streak of more than 200 years. The utility started paying a dividend in 1816. In addition, York Water has a 25-year dividend growth streak making the company a Dividend Champion. The dividend yield is 1.91%, based on a dividend rate of $0.78 per share. York Water has been increasing the dividend at about a 4% CAGR.

Portfolio Insight - Dividend Growth YORW
Source: Portfolio Insight*

The dividend safety is solid, with a payout ratio of ~58%. Operating cash flow of approximately $22 million is more than double the dividend requirement of $10 million in the last twelve months. York Water has an A- upper-medium investment grade credit rating adding to the dividend safety.

York Water is not as undervalued like the other water utilities on this list. It trades at an earnings multiple of 30.85X, below its 5-year range and within its 10-year range.

Essential Utilities (WTRG)

Essential Utilities (WTRG) is another Pennsylvania-based water utility. The company was known as Aqua America until February 2020, when it changed its name to Essential Utilities. The utility was founded in 1886. Today, it is the largest American water utility. The company operates through two segments: Aqua, a water and wastewater treatment business; and Peoples, a natural gas business.

Essential Utilities serves more than one million water and wastewater connection customers and three million people in Pennsylvania, New Jersey, Virginia, North Carolina, Ohio, Indiana, Illinois, and Texas. Also, it serves 750,000+ natural gas connections and over two million people in Pennsylvania, Kentucky, and West Virginia.

Total revenue was around $1,878 million in 2021 and $2,046 million in the past twelve months.

Essential Utilities has a 31-year streak of dividend increases making the water stock a Dividend Champion. The forward dividend yield of 2.64% is above the 5-year average of 2.25%. The company is increasing the dividend at roughly 7% per annum.

Portfolio Insight - Dividend Yield History WTRG
Source: Portfolio Insight*

The dividend safety is reasonably conservative, with a payout ratio of about 62%. Operating cash flow of ~$648 million covers the dividend requirement of $274 million. The utility has an A/Baa2 upper-medium / lower-medium investment grade credit rating.

Essential Utilities is trading at 24.3X times consensus 2022 earnings. This value is below the 5-year range but within the 10-year range. As a result, investors may want to consider adding to existing positions or starting a new one in this water stock.

Industrial Water Stocks

Besides water utilities, many companies provide the components, software, and services for water and wastewater treatment.

Ecolab (ECL)

Ecolab (ECL) is a specialty chemical company founded in 1923. Today, one of the leading businesses is water treatment and purification. Also, Ecolab manufactures and sells cleaning and sanitizing supplies to the industrial, healthcare, hospitality, restaurant, and other markets. In water treatment, Ecolab’s customers are primarily factories, power plants, pulp and paper plants, food and beverage processing, petrochemical plants, and life sciences.

Total revenue was around $12,733 million in 2021 and $13,533 million in the past twelve months.

Ecolab is a Dividend Aristocrat and Dividend Champion with 30 years of consecutive annual increases. The dividend yield is 1.42%, based on a forward dividend rate of $4.76 per share. The dividend yield is nearly the highest in the past decade and much more than the 5-year average. The dividend growth rate is slowing but still healthy at about 6.55% on average in the trailing 5-years.

Portfolio Insight - Dividend Yield History ECL
Source: Portfolio Insight*

Ecolab’s dividend safety is excellent. The payout ratio is modest at ~41.6%. The free cash flow (FCF) of $1,041 million covers the dividend’s need of around $584 million in the last twelve months. The company has an A-/A3 upper-medium investment grade credit rating enhancing the dividend safety.

After several years of overvaluation, the P/E ratio has come down to 30.24X, within the 5-year and 10-year ranges. But on an absolute basis, the P/E ratio is still elevated.

Related Article About Ecolab on Dividend Power

Xylem (XYL)

Xylem (XYL) was incorporated in 2011. The company was previously known as ITT WCO. Today, Xylem designs and makes engineered products for water and wastewater treatment globally. The company has three operating segments: Water Infrastructure, Applied Water, and Measurement & Control Solutions.

Total revenue was around $5,195 million in 2021 and $5,224 million in the past twelve months.

Xylem has paid and increased the dividend since 2011, making the stock a Dividend Contender. The dividend yield is low, though, at 1.36%. But the growth rate has been high at approximately 27% in the past decade and 12.6% in the past 5-years.

Portfolio Insight - Dividend Growth XYL
Source: Portfolio Insight*

The moderate payout ratio of 45% means more increases ahead and provides confidence about dividend safety. The FCF covers the dividend payout each year. Xylem has BBB/Baa2 lower-medium investment grade credit rating. However, leverage has been declining.

Xylem usually trades at a premium and now has a P/E ratio of 33.82X, more than the 10-year range and at the higher end of the 5-year range. As a result, investors may want to wait for a better entry point for this water stock.

Badger Meter (BMI)

Badger Meter (BMI) is a small industrial company specializing in meters. The firm was founded in 1905. The company sells water meters, software, instrumentation, and valves globally to water utilities and industrial customers. Its products measure and control the flow of water.

Total revenue was around $505 million in 2021 and $535 million in the past twelve months.

Despite its small size and focus on water, Badger Meter is well-known as a dividend growth stock. The company has paid a growing dividend for 30 years. However, the forward dividend yield is a paltry 0.97%, below the 5-year average. However, the dividend growth rate is healthy at ~12% in the trailing five years.

Portfolio Insight - Dividend Growth BMI
Source: Portfolio Insight*

The conservative payout ratio of about 37% provides excellent dividend safety. Moreover, the FCF of $66 million is nearly triple the dividend needs of $23.4 million in the preceding twelve months. In addition, Badger Meter has a fortress balance sheet with a net cash position.

The company is not undervalued, trading at 41.16X consensus earnings estimates. As a result, investors may want to wait on this high-quality water stock.

Danaher (DHR)

Danaher (DHR) is an industrial conglomerate founded in 1969. The company operates through three segments, and one is Environmental & Applied Solutions. This segment sells instrumentation, software, consumables, and services to treat and manage ultra-pure water for residential, commercial, and industrial use.

Total revenue was around $29,454 million in 2021 and $30,816 million in the past twelve months.

Danaher is a relative newcomer to dividend growth and only has an eight-year streak making this water stock a Dividend Challenger. The forward dividend yield is a meager 0.38%, below the 5-year average of 0.45%. However, the dividend has been growing at a roughly 8% CAGR in the past five years off a small base. In addition, the low minimal payout ratio of 8.4% means there are probably many more increases.

Portfolio Insight - Dividend Growth DHR
Source: Portfolio Insight*

Also, the highly conservative payout ratio means the dividend has little risk. Free cash flow of $7,051 million exceeds the dividend requirement several times over each year. In addition, Danaher has a BBB+/Baa1 lower-medium investment grade credit rating with reasonable leverage and more than 35X interest coverage.

Danaher is trading a forward P/E ratio of 24.8X, below the 5-year range and within the 10-year span. As a result, investors may want to research this water stock further.

Final Thoughts on Invest in Water Stocks

Water is a necessity for life. Consequently, water stocks are a large part of the Industrial sector. The stocks in this industry typically have low beta or volatility, suggesting they are a good choice for downside protection. Furthermore, revenue and earnings tend to grow annually as populations and demand increase. On the other hand, they are rarely undervalued.

Disclosure: Long ECL

Thanks for reading Invest in Water Stocks!

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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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