Up to date on June eighth, 2021 by Nikolaos Sismanis
Water is likely one of the fundamental requirements of human life. Life as we all know it can’t exist with out water. For this straightforward cause, water could be the most beneficial commodity on Earth.
It is just pure for traders to contemplate buying shares of the businesses concerned in water. There are numerous totally different corporations that can provide traders publicity to the water enterprise, equivalent to water utilities. Another corporations are engaged in water purification.
In all, we now have compiled an inventory of over 50 shares which might be within the enterprise of water. The checklist was derived from 5 of the highest water business exchange-traded funds:
- Invesco Water Assets ETF (PHO)
- Invesco S&P International Water ETF (CGW)
- Invesco International Water ETF (PIO)
- First Belief ISE Water Index Fund (FIW)
- Ecofin International Water ESG Fund (EBLU)
You possibly can obtain a spreadsheet with all water shares (together with metrics that matter like price-to-earnings ratios and dividend yields) by clicking on the hyperlink under:
Along with the Excel spreadsheet above, this text covers our prime 7 water shares immediately, that we cowl within the Certain Evaluation Analysis Database.
This text will focus on the highest 7 water shares ranked by a qualitative mixture of their enterprise mannequin power, present dividend yield, and future dividend development potential.
Desk of Contents
Water Inventory #7: International Water Assets, Inc. (GWRS)
International Water Assets is especially interesting as a result of it’s a month-to-month dividend inventory. In actual fact, it’s the solely American water firm that pays dividends on a month-to-month foundation. Water shares are sometimes praised for his or her very steady and safe money flows. Including the aspect of receiving dividends on a month-to-month foundation additional provides to investor certainty and whole return predictability.
The corporate owns, operates, and manages regulated water, wastewater, and recycled water utilities primarily in metropolitan Phoenix, Arizona. As a result of Arizona’s water market is fragmented, mixed with the actual fact it’s presently the U.S.’s quickest state when it comes to homeownership development state, International Water is benefiting from nice natural development prospects.
Its regulated annual revenues have been rising quickly over time. Attributable to water being a crucial commodity whose consumption is generally uncorrelated to the occasions affecting the general economic system, revenues ought to stay resilient throughout a possible recession, as was the case through the Nice Recession.
Supply: Annual Report
The corporate utilized unique monetary engineering to help its dividend funds previously whereas it was reinvesting the vast majority of its earnings in direction of increasing its operational community and buying its smaller opponents.
Nonetheless, with EPS (earnings per share) probably quickly to catch as much as its underlying dividend, in addition to the corporate growing its dividend yearly since initiating it 6 years in the past (even when such will increase are marginal), traders ought to take into account International Water’s month-to-month dividend comparatively dependable.
Water Inventory #6: Algonquin Energy & Utilities (AQN)
Algonquin Energy & Utilities Corp. trades on each the Toronto Inventory Alternate and New York Inventory Alternate beneath the ticker AQN. The renewable energy and utility firm was based in 1988. The corporate has elevated its dividend yearly since 2011.
The three components of its enterprise are regulated utilities (pure gasoline, electrical, and water), non-regulated renewables (wind, photo voltaic, hydro, and thermal), and world infrastructure. Algonquin serves greater than 1 million connections, primarily within the U.S. and Canada. It additionally has renewable and clear vitality services which might be largely (greater than 90%) beneath long-term contracts with inflation escalations embedded.
Supply: Investor Presentation
Acquisitions are a significant a part of Algonquin’s future development potential. Final yr, Algonquin acquired ESSAL for $162 million, in addition to Ascendant. ESSAL is a Chilean water utility that added ~230,000 connections. Ascendant’s main subsidiary is BELCO, the one electrical utility in Bermuda. BELCO is a regulated utility and added ~36,000 connections.
Q1-2021 marked the primary full quarter with contributions from each ESSAL and BELCO, leading to adjusted EBITDA development of 17% to $282.9 million. The corporate’s Board of Administrators additionally permitted a ten% dividend enhance, sustaining Algonuin’s wonderful monitor report of shareholder returns.
Traditionally, Algonquin’s earnings development has been unstable. Nonetheless, they’ve turn into extra stabilized previously few years, as the corporate has elevated its scale with a extra diversified asset base. Belongings now consist largely of regulated utilities with predictable returns or renewable services with long-term contracts that generate steady money movement. Particularly, its 2015 to 2020 annual EPS development price was 14.2% based mostly on USD phrases.
The corporate stays considered one of Canada’s fastest-growing and dependable investments amongst utilities, prone to preserve delivering strong returns each when it comes to capital features and dividend earnings.
Water Inventory #5: Important Utilities, Inc. (WTRG)
Important Utilities is the second-largest publicly traded water utility within the U.S., serving roughly 5 million clients throughout 10 states. The corporate has raised its dividend for 29 consecutive years, which qualifies it to be a member of the Dividend Champions checklist.
The corporate has paid a quarterly dividend for 76 consecutive years. In 2020, which was a yr that proved itself to be a difficult one to quite a few industries and companies, Important Utilities was one of many few that was largely unaffected from the hostile shocks of COVID-19, with whole water utilization was up 0.8% YoY.
Supply: Investor Presentation
The corporate has compounded its adjusted earnings-per-share at a CAGR (compound annual development price) of seven.4% over the past decade. We count on the corporate to maintain increasing its backside line yearly at round 7%, on common. Development might be powered by its current main acquisition of Peoples, natural development, and controlled annual price hikes.
To focus on the corporate’s deal with development, Important Utilities has closed practically 200 acquisitions and ventures within the final 10 years, shopping for its smaller opponents and integrating them into its huge community. Amid a really wholesome payout ratio of round 60%, we additionally count on the corporate to continue to grow its dividend yearly at round 7%, just like its present 5-year common.
Water Inventory #4: The York Water Firm (YORW)
Within the fourth place of our greatest water shares is an organization with two very distinctive traits. Firstly, The York Water Firm is the oldest investor-owned water utility in america, having functioned constantly since 1816.
Secondly, and extra impressively, the corporate options one of the spectacular dividend histories ever recorded. The York Water showcases a spectacular report of over 200 years of uninterrupted dividend funds to shareholders, together with 24 years of consecutive dividend annual will increase as of immediately.
Supply: Annual Report
Because of the firm’s very mature operations and predictable enterprise mannequin, York Water has seen a really regular and gradual development in its EPS, which contains a 10-year CAGR of 6.7%. Future development catalysts embrace a rising variety of clients and distribution services, in addition to acquisitions of wastewater techniques.
For context, throughout 2020, clients grew by 1.8% to 72,681 (inhabitants served of greater than 202,000). Consequently, we count on the corporate’s wonderful dividend-per-share development report to proceed at an annualized price of round 4% over the following 5 years. This is able to be in-line with its newest enhance and likewise in-line with the present development of an bettering payout ratio (presently 59%).
The corporate’s money flows are unlikely to be affected by any potential recession, as was the case through the Nice Recession and the COVID-19 pandemic. The corporate operates inside an unique franchised territory that’s considerably free from direct competitors with different public utilities, municipalities, and different entities, including one other layer of security to its enterprise mannequin.
Water Inventory #3: California Water Service Group (CWT)
California Water Service is the 4th-largest publicly-owned water utility in america. The corporate has six subsidiaries that present water to about 2 million folks, primarily in California, with some further operations in Washington, New Mexico, and Hawaii.
California Water Service has elevated its dividend for greater than 50 consecutive years, which makes the corporate a Dividend King. You possibly can see a full checklist of all 31 Dividend Kings right here.
California Water Service reported its first-quarter earnings outcomes on April twenty eighth. Quarterly revenues had been $147.7 million, 17.6% versus the comparable interval final yr. Income development got here from price will increase that had been negotiated all through the final yr and that had been justified by increased water prices for the corporate.
The corporate’s previous and estimated regulated price base will increase could be seen within the graph under:
Supply: Investor Presentation
Over the previous decade, California Water Service has grown its earnings-per-share at a mean annual price of 4%, which is a good tempo of earnings development for a utility. We imagine that California Water Service’s earnings-per-share will proceed to develop at a mid-single digits price going ahead, because it did previously.
Earnings development, in the long term, ought to be achievable because of the speed hikes which might be often permitted by related authorities/regulators, in addition to natural development equivalent to inhabitants development and elevated water consumption.
California Water Service has paid out between 50% and 70% of its internet earnings all through many of the final decade. General, the dividend payout ratio has declined barely over that timeframe, as the corporate’s dividend development price was decrease than its earnings-per-share development price.
The predictable nature of the corporate’s earnings, mixed with a payout ratio that’s not overly excessive, implies that the dividend appears very protected. Its 54-year report of annual dividend will increase is actually a testomony to that.
Water Inventory #2: American States Water Firm (AWR)
American States Water is a utility firm with two enterprise models: Utilities (primarily water, some electrical energy) and Companies (wastewater providers on a number of US army bases). American States Water relies in California, the place it operates its utility enterprise. The corporate’s providers unit spans a number of US states. American States Water can also be a Dividend King, having raised its dividend for 66 consecutive years.
The corporate reported its first-quarter earnings outcomes on Could third, 2021. Absolutely diluted earnings-per-share elevated from $0.38 in Q1 2020 to $0.52 in Q1 2021, whereas income for the primary quarter grew by 7.3% to $117.06 million year-over-year. Consolidated adjusted diluted earnings per share elevated by 20.9% per share, in comparison with final yr’s quarter.
Between 2011 and 2020, American States Water grew its earnings-per-share at a price of seven.6% yearly. The corporate managed to extend its profitability even over the past monetary disaster, which exhibits that American States Water’s profitability shouldn’t be cyclical. We count on the corporate to retain its strong efficiency whatever the state of the economic system.
Due to this fact, it ought to have the ability to keep and lengthen its extended dividend development, which contains a 10-year CAGR of round 9.4%.
Supply: Q1 Presentation
American States Water’s utility revenues will more than likely proceed to develop at a gradual tempo, as regulators will enable the corporate to extend its charges over time in an effort to encourage spending on development and upkeep tasks. The corporate is constructing out its providers enterprise by getting contracts for wastewater providers on further US army bases.
The contracts for wastewater providers on US army bases span a 50-year interval every, so getting one such contract gives for a decades-long and really protected income stream.
The corporate has elevated its dividend yearly for 66 years in a row, which might solely be described as a really lengthy and profitable dividend development monitor report.
Water Inventory #1: American Water Works Firm, Inc. (AWK)
Closing the checklist of our prime water shares is American Water Works. Whereas the corporate could not characteristic the extended dividend development data that its friends mentioned earlier, American Water is the most important and most geographically various, publicly traded water and wastewater utility firm in america, as measured by each working revenues and inhabitants served.
The corporate gives consuming water, wastewater, and different associated providers to over 15 million folks in 46 states. Its regulated enterprise consists of 53,000 miles of pipe, 609 water therapy vegetation, 150 wastewater services, 110 wells, and 75 dams.
Supply: Investor Presentation
American Water Works has a extremely steady and strong monitor report each when it comes to its profitability and its dividend funds. The corporate enjoys a particularly resilient enterprise mannequin as a consequence of water being a necessity each for residential and industrial utilization, in addition to a mission-critical asset for the army. Because of this, American Water has been in a position to develop its community and operations with restricted dangers.
As a substitute of predicting the corporate’s future earnings development, administration has already shared its outlook, anticipating to develop EPS by roughly 7%-10% yearly over the following few years, powered by 5%-7% from regulated funding capex, 1.5%-2.5% from regulated acquisitions, and ~1% market-based companies. EPS development consists of price base will increase which the corporate estimates to develop by a CAGR of seven%-8% going ahead.
Consequently, we count on stable dividend will increase shifting ahead at round 9% yearly, simply supported by the corporate’s underlying profitability. American Water Works presently contains a wholesome payout ratio at round 57%. Attributable to its vastly diversified operations and predictable future money flows, it ought to proceed rising its earnings and dividend earnings for its traders for many years to come back.
Last Ideas
Water may very well be one of many largest investing themes over the following a number of many years. An growing world inhabitants is just going to trigger demand for water to rise sooner or later. And, given the truth that water is a necessity of human life, demand for water ought to maintain up extraordinarily effectively, even through the worst recessions. Due to this fact, traders with an extended time horizon equivalent to Millennials ought to take into account water shares.
These components make water shares interesting for risk-averse traders searching for stability from their inventory investments. Not all of the water shares on this checklist obtain purchase suggestions presently, as some seem like overvalued immediately. However all of the water shares on this checklist pay dividends and are prone to enhance their dividends for a few years sooner or later.
Thanks for studying this text. Please ship any suggestions, corrections, or inquiries to [email protected].
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