The 7 Best Water Supply Stocks to Buy for Portfolio Diversification


With recent headwinds in the banking sector spilling over into other segments of the economy, investors may want to seek opportunities in the best water utility stocks to buy. No, utilities aren’t exciting investment sectors, but that’s the point. In a way, their boring nature focuses on their generally predictable dealings. Also, utility companies have natural monopolies due to the extreme barriers to entry.

Basically, the best water supply stocks also have a key advantage: The underlying resource is the most valuable on earth. While most of the earth is covered with water, only a small portion of it is potable. As geopolitical tensions almost always rise, competition to secure the necessary supplies is ignited. Therefore, it only makes sense to consider these critical companies.

CWT California Water Service $56.81
SJW SJW group $75.70
VEOEF Veolia environment $28.67
AWK American Waterworks $141.81
MSEX Middlesex Water $76.21
XYL xylem $94.73
WTRG Essential Utilities $42.56

California Water Service (CWT)

A photo of water being poured into a glass that sits on a table.

Source: HQuality/ShutterStock.com

Headquartered in San Jose, California, California Water Service (NYSE:CWT) provides drinking water and wastewater services. According to its public profile, it is the third largest publicly traded water utility in the US owned by investors. California Water serves two million people through subsidiaries in Hawaii, New Mexico, Washington and its home state. Currently, CWT is trading at a relative discount, having lost nearly 7% since opening in January.

As a utility, it doesn’t offer stellar financial metrics, as you’d expect. At an operational level, California Water’s three-year free cash flow (FCF) growth rate is 10.8%, outperforming the industry’s 61.29%. Also, the book growth rate over the same period is 14.4%, which is above the industry’s 82.52%. The company currently carries a forward yield of 1.81%. Specifically, CWT has 56 years of consecutive annual dividend increases.

Finally, Wall Street analysts view CWT as a consensus moderate buy. Their average price target hit $60.50, which means over 5% upside potential. With a balanced profile, CWT is among the best water utility stocks to buy.

SJW Group (SJW)

A photo of small bubbles in a container of water.

Source: khak/ShutterStock.com

Also based in San Jose, SJW group (NYSE:SJW) is a processing, distribution, wholesale and retail company for water utilities. According to its corporate profile, SJW serves 228,000 connections, reaching over one million residents in California regions. It also provides services to 60,000 people in Texas. So far this year, SJW is down nearly 7%. Over the past year, however, SJW has gained about 14% of its stock value.

From a financial standpoint, SJW makes a strong case for the best water utility stocks to buy. Operationally, the company’s three-year revenue growth rate is 11.5%, over 69% for the industry. Also, its EBITDA growth rate is 20.5% over the same period, beating 82.2% of its peers. In terms of profitability, the company’s net margin is 11.83%, outperforming 64% of industry players. As of this writing, SJW carries a forward yield of 1.98%. It also boasts 56 years of uninterrupted dividend increases. Finally, cover analysts consider SJW to be a consensus. However, their average price target is $84.50, which means over 10% upside potential.

Veolia Environment (VEOEF)

a water picture

Source: Shutterstock

A French transnational company Veolia environment (OTCMKTS:VEOEF) is a utility company covering three main service areas: water management, waste management and energy services. Interestingly, Veolia also specializes in desalination, or the process of converting seawater into potable (drinking) water. Since the beginning of the year, VEOEF has gained over 8% of its stock value. However, over the past year it has been undervalued, falling 13% below par.

Despite the red ink, adventurous investors in the best water utility stocks should take a look at Veolia. In terms of its financials, the company boasts a 17.9% three-year book growth rate, over 70% of its peers. Also, it has made profits in nine of them over the past 10 years. Perhaps most attractive to potential buyers is VEOEF’s market price at a forward multiple of 15.49. At a discount to revenue, Veolia performs better than 60.87% of the competition. For now, cover analysts view VEOEF as a consensus moderate buy. Their average price target is $31.99, which means almost 12% upside potential.

American Water Works (AWK)

Source: Shutterstock

a public utility company, American Waterworks (NYSE:AWK) provides water and wastewater services in the United States through its subsidiaries. According to its corporate profile, American Water serves approximately 1,700 communities in 14 states. That corresponds to around 14 million people over 3.4 million customer connections. Despite its relevance, AWK’s stock value has fallen over 7% year-to-date.

Still, it’s worth taking a look at one of the underrated examples of the best water utility stocks. Operationally, the company has a three-year book growth rate of 7.7%, outperforming 65% of its peers. In terms of revenue, Stadtwerk has a net margin of 21.62%. This stat outperforms 87.82% of industry peers. It also enjoys a 10-year profitability over the last ten years. For passive income, American Water offers a forward yield of 1.84%. Notably, it boasts 13 consecutive years of dividend increases. As for Wall Street, analysts think AWK is a consensus. However, their average price target is $163, which means over 14% upside potential.

Middlesex Water (MSEX)

Source: Shutterstock

Based in New Jersey, Middlesex Water (NASDAQ:MSEX) is a water company with a long history, first established in 1897. It is currently one of the mid-tier companies among the best water utility stocks, with a market capitalization of $1.34 billion. Since opening in January, MSEX is down 4%. Over the past year, shares have fallen 25%, reflecting a higher risk profile.

Nonetheless, MSEX can offer greater reward potential in exchange for this risk. In addition, the finances are not that bad, at least compared to other utilities. For example, Middlesex’s three-year EBITDA growth rate is 12.4%, ahead of its peers’ 69.79%. Also, the FCF growth rate is 18.7% over the same period, beating almost 71% of industry players. Also, the company enjoys strong profitability with a net margin of 26.12%. Unfortunately, the forward yield does not quite reflect this at 1.63%. Still, it boasts 27 years of consecutive dividend increases. Finally, Robert W. Baird’s Ben Kallo thinks MSEX is a buy. The experts expect the shares to hit $88, which means upside potential of almost 15%.

xylem (XYL)

Lots of water bottles.  Bottles with blue caps.

Source: DenisProduction.com / Shutterstock.com

Based in Washington, DC, xylem (NYSE:XYL) is a provider of water technology. It serves the public utility, residential, commercial, agricultural and industrial sectors. In addition, Xylem operates in more than 150 countries. Since the start of the new year, XYL’s market value has fallen by over 12%. However, over the past 365 days, it has gained more than 10%. It may possibly go higher in the future.

According to Gurufocus.com’s own fair market value (FMV) calculations, XYL is rated as slightly undervalued. Arguably, the company’s greatest strengths lie largely in its profitability metrics. For example, its operating margin over the past year is 11.79%, ahead of the competition’s 73.56%. Additionally, the return on equity is 10.88%, beating 64.31% of its peers. Currently, Xylem carries an expected yield of 1.36%. While it’s not the most generous rate of passive income, its payout ratio is 36.72%.

Finally, cover analysts view XYL as a consensus moderate buy. Additionally, their average price target is $118.43, which represents an upside potential of almost 22%. As such, it’s one of the best water utility stocks to buy for its sheer capital gains potential.

Basic Utilities (WTRG)

Flooded quarry for limestone mining.  turquoise water.  White beaches.  water supplies.

Source: Klintsou Ihar / Shutterstock.com

A utility company with interests in several states, primarily in the Midwest and South, Essential Utilities (NYSE:WTRG) provides infrastructure and services for drinking water and wastewater treatment. Although Essential is one of the most popular ideas among the best water supply stocks, it also represents a volatile trade. Since opening in January, WTRG has slipped nearly 11%. And over the past year, it’s down almost 10%.

Still, WTRG could be intriguing for the adventurous type. According to Gurufocus.com’s FMV calculations, WTRG is rated as slightly undervalued. Objectively, the company benefits from strong growth and profitability. The three-year revenue growth rate is 28.3%, outperforming almost 94% of the competition. For net margin, the 20.33% metric beats nearly 86% of its industry peers. Notably, Essential offers a relatively solid passive income with a forward yield of 2.66%. Additionally, it has 31 years of uninterrupted dividend increases. Looking across the street, cover analysts are unanimous in their view of WTRG as a strong buy. Their average price target is $54, which means over 25% upside potential.

On the day of publication Josh Enomoto had (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author and are governed by InvestorPlace.com Posting Policies.

A former Senior Business Analyst at Sony Electronics, Josh Enomoto helped broker key deals with Fortune Global 500 companies. Over the past several years, he has provided unique, crucial insights for the investment markets as well as various other industries including legal, construction management and healthcare.

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