Consider these top water stocks and ETFs to buy now.
What keeps the global economic machine running? An argument could be made that it’s the stuff coming out of your kitchen tap. As the world’s most used commodity, and one that is increasingly scarce at that, water is essential not only for life, but also for a variety of industries. Agriculture, beverages and even power generation rely on the free flow of water. Now investing in water doesn’t mean you have to stock up on Aquafina bottles in your basement. Instead, investors can buy the stocks of companies involved in the sourcing, purification and distribution of water, which tend to hail from the utilities or consumer staples sectors. If increased diversification is what you seek, an exchange-traded fund that holds multiple water-related stocks can also be an excellent alternative. Here is a list of seven great water stocks and ETFs to buy in 2022.
Essential Utilities (ticker: WTRG)
WTRG is a utilities company operating in Pennsylvania, Ohio, North Carolina, Illinois, Texas, New Jersey, Indiana and Virginia. The company primarily provides drinking water and wastewater treatment infrastructure. Originally called Aqua America, the company grew via a series of more than 300 mergers and acquisitions between 1993 and 2013. In 2021, revenue and net income were up 28.4% and 51.5%, respectively, compared with 2020, showing strong growth. Cash from operations also soared by about 27%, putting WTRG in a strong financial position heading into 2022. The company also has an operating margin of 32.1%, which helps keep its bottom line steady. The stock has a lower beta of 0.65, which means it only exhibits about two-thirds of the volatility seen in the wider market. WTRG pays an annual dividend of $1.07, for a yield of 2.3%. WTRG is set to report earnings for the first quarter before markets open May 9, so consider listening in if you’re thinking about buying.
Xylem Inc. (XYL)
XYL is one of the few water companies not from the utilities sector. Rather, it sits in the industrials sector, designing, manufacturing and servicing a variety of technology products used in the water and wastewater industry. Its segments include water infrastructure, measurement and control systems. Notable products include pumps, valves, controls, meters and leak detection equipment. XYL has a strong economic moat, having established itself as the premier manufacturer and supplier through an extensive network of direct sales, resellers, distributors and third-party service providers. Unfortunately, the company was rather hard-hit by COVID-19, with quarterly revenue and earnings still down about 4% and 22%, respectively, in the fourth quarter of 2021 versus the same quarter a year prior. Despite this, the company is still flush with $1.35 billion in cash on the balance sheet as of the most recent quarter and manages to pay a dividend yield of 1.5%.
American Water Works Co. Inc. (AWK)
With a market cap near $29 billion, AWK is the largest water utility stock in the U.S. Having completed two dozen acquisitions in 2021 alone, the company continually grows and expands its infrastructure, services and regions covered. The company also spends liberally on capital projects with the goal of upgrading its infrastructure to maintain high-quality services. Just recently, AWK announced a $3.4 million upgrade to its aging water pipelines in Pennsylvania. In the fourth quarter of 2021, AWK reported a 3% increase in revenue, which beat analyst estimates and expectations for the utilities sector. AWK also divested its subsidiaries in New York and Michigan in early 2022, pocketing over $610 million in total. If you’re looking to buy, make sure you monitor AWK’s operation and maintenance efficiency ratio, which reflects how well the company is controlling costs. A lower number is better, and in 2021, AWK’s came in at 34.1%, down from 34.3% in 2020 and 34.5% in 2019.
Primo Water Corp. (PRMW)
PRMW offers water to consumers through brands including Earth2O, Crystal Springs, Sierra Springs, Mountain Valley and Deep Rock bottled water, plus filtration equipment and coffee and water dispensers. PRMW recently reported its full-year results in February, with revenues increasing by 6% from $1.95 billion to $2.07 billion, and adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA, increasing by 5% from $362 million to $380 million. The company also repurchased approximately 2.6 million shares for $44 million. Management provided guidance for 2022, stating that it expected revenue growth of 9% to 10% and adjusted EBITDA of $410 million to $420 million. If you’re interested in seeing whether PRMW can deliver on this guidance, the first-quarter 2022 earnings call is scheduled for May 12 before market open.
Invesco S&P Global Water Index ETF (CGW)
Investors. seeking a more passive, hands-off approach to investing in water stocks can eschew the prior tickers and buy CGW instead. This ETF holds the stocks of 50 global companies involved in the water industry, focusing on utilities, industrials and consumer staples companies. About 50% of the ETF comprises mid-cap stocks offering a blend of value and growth traits. The top five holdings are American Water Works, Xylem, Veolia Environment SA (VEOEY), Essential Utilities and Severn Trent PLC (SVT). The ETF has a global focus, with 55.9% of the fund in the U.S.; 17.3% in the U.K.; 6.6% in Switzerland; 5.6% in France; and about 3% or less in Canada, Japan, the Netherlands, Italy and Brazil. CGW pays a 30-day SEC yield of 1%, with an expense ratio of 0.57%.
First Trust Water ETF (FIW)
FIW tracks the ISE Clean Edge Water Index. This market-cap-weighted index is made up of 36 global water industry companies that are mainly focused on potable and wastewater segments. Notably, the index places restrictions on market capitalization, liquidity and weighting, ensuring that only the top stocks in the industry are represented by their market cap. This gives FIW more of a semi-active approach compared to CGW, owing to its stricter criteria for eligible stocks. Holdings are rebalanced semi-annually. The ETF is more weighted to mid-caps, with a median market cap of $5.3 billion. Notable top holdings include American Water Works, Aecom (ACM) and Essential Utilities. FIW pays a 30-day SEC yield of 0.5% and charges an expense ratio of 0.54%. The ETF has posted three-, five- and 10-year trailing returns of 18.8%, 15.8% and 14.3%, respectively.
Invesco Water Resource ETF (PHO)
Unlike CGW, PHO tracks the NASDAQ OMX U.S. Water Index, focusing on the stocks of 38 U.S.-listed companies involved in the conservation or purification of water for commercial and consumer uses. Once again, American Water Works is the largest holding, at 8.7%, with the next-largest weights being Roper Technologies Inc. (ROP), Ecolab Inc. (ECL), Danaher Corp. (DHR) and Xylem. Industrial stocks dominate PHO, constituting nearly 57% of the ETF, with the next-largest sector weighting being utilities at 19.9%, followed by health care at 11.9%. Trailing three-, five- and 10-year returns for the ETF stand at 17.3%, 16.5% and 12%, respectively. PHO pays a 30-day SEC yield of 0.4% and costs an expense ratio of 0.6%. The ETF has attracted assets under management of $1.7 billion since inception.
7 best water stocks and ETFs to buy now:
— Essential Utilities (WTRG)
— Xylem Inc. (XYL)
— American Water Works Co. Inc. (AWK)
— Primo Water Corp. (PRMW)
— Invesco S&P Global Water Index ETF (CGW)
— First Trust Water ETF (FIW)
— Invesco Water Resource ETF (PHO)
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Update 04/28/22: This story was published at an earlier date and has been updated with new information.