Article by Vintage Value Investing

Water stocks have performed extremely well over the past 3 years. This is especially true of water utility stocks, both because they are well-regulated and because they act like natural monopolies. Although water utility stocks, following a long period of growth, have experienced some pull back since mid-2016 (and may continue this trend over the near term), they remain among the strongest and safest long-term stock investments.

Clean Water Stocks
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Water Stocks

Read: How to Invest in Water Like Dr. Michael Burry from The Big Short

There are nine water utility stocks with market caps greater than $300 million dollars. Here are those stocks, along with their total 10-year return (for reference, the S&P 500 average 10-year return is 96.7%):

  • American Water Works: 349.8%
  • Sabesp: 152.7%
  • Aqua America: 114.5%
  • American States Water: 192%
  • California Water Service: 121.4%
  • SJW Group: 68.6%
  • Middlesex Water: 203.1%
  • Connecticut Water: 220%
  • York Water: 170.4%

Of these, three stand out as the strongest for long-term value investors. They are:

1. American Water Works

Because of its size (of publicly traded water and wastewater utilities in the United States, it’s the largest, operating in 47 states and 1 Canadian province), American Water Works has a unique ability to acquire smaller utilities in a heavily fragmented industry. That provides the company an unparalleled expansion opportunity in areas geographically close to its current operations that bodes well for long-term investors.

Its geographic diversity provides another advantage—American Water Works faces less threats from the impact of regional climate change, such as droughts. In addition, the American Water Works’ recent expansion into providing water for gas exploration and production companies (with its acquisition of Keystone Water Solutions in 2015) promises increased earnings with expected continued recovery in the energy market.

Current analyst estimates put growth earnings at an annual rate of 7.6% for the next five years. Although projected growth for one other pure-play water utility, California Water Services, is slightly higher at 7.8%, the lion’s share of that growth will occur this year. With expected steadier growth in the long-term, American Water Works stock offers a stable, safe investment option.

2. American States Water Company

American States Water, with operations primarily in California, is significantly smaller than American Water Works—that smaller size, however, has empowered the company to achieve rapid growth. Over the past decade, American States Water has posted an average annual growth rate of 7%, and an average annual profit of 12.5% over the past five years. Its forward valuation is 23.5; its dividend yield is 2.2%.

American States Water operates the Golden State Water Company in 10 California counties. It also manages both an electric utility and contracted services on water projects at U.S. military bases across the country. Although the company’s relative lack of diversification, concentrated as its operations are in one state, are some reason for concern, expectations are that it will continue to grow, taking advantage of California’s booming economy.

3. Aqua America

Providing water and wastewater services to some three million people in Pennsylvania, Ohio, Virginia, North Carolina, Illinois, New Jersey, Indiana and Texas, Aqua America’s diversification and unregulated market basis are among the reasons analysts cite for the company’s robust growth and long-term prospects. Aqua America has, in addition, an aggressive acquisition posture—in 2012, for example, the company, in a joint venture with Penn Virginia Resource, initiated services supplying water fracking operations in the Appalachian basin.

All these factors have made Aqua America attractive to investors. The suburban Philadelphia-based company boasts an impressive 70 consecutive years paying investors dividends, and 23 consecutive years of increasing dividends. The company’s trailing 12-month profit margin is a healthy 25.4%, one of the highest of any water stock in the nation, and substantially higher than American Water Works’ 15.1%.

Conclusion

How you make stock investments is a function of how much risk you’re willing to take. High-risk investments have the advantage of potentially high profits, for example. The water stocks listed here are noted as among the “best” because of they represent relatively low-risk and have consistent performance over many years. They are, for that reason, smart stock selections for investors who are in it for the long haul. Before finalizing your stock picks, make sure you take a read through The Official Water Stock Guide, as well as The Ultimate Guide to Value Investing.

Article by Vintage Value Investing