The Best Water Stocks That Should be on Your Watchlist

Sure Dividend published this fantastic post of the best water stocks to buy. They have given us permission to republish it here.

Water is one of the basic necessities of human life. Life as we know it cannot exist without water. For this simple reason, water may be the most valuable commodity on Earth.

It is only natural for investors to consider purchasing water stocks. There are many different companies that can give investors exposure to the water business, such as water utilities. Some other companies are engaged in water purification.

In all, we have compiled a list of over 50 stocks that are in the business of water. The list was derived from five of the top water industry exchange-traded funds:

  • Invesco Water Resources ETF (PHO)
  • Invesco S&P Global Water ETF (CGW)
  • Invesco Global Water ETF (PIO)
  • First Trust ISE Water Index Fund (FIW)
  • Ecofin Global Water ESG Fund (EBLU)

You can download a spreadsheet with all 56 water stocks (along with metrics that matter like price-to-earnings ratios and dividend yields) by clicking on the link below:

Click here to download your spreadsheet of all 50+ water stocks now.

In addition to the Excel spreadsheet above, this article covers our top 7 water stocks today, that we cover in the Sure Analysis Research Database.

This article will discuss the top 7 water stocks according to their expected returns over the next five years, ranked in order of lowest to highest.

Water Stock #7: Roper Technologies (ROP)

  • 5-year expected annual returns: 9.4%

Roper Technologies is a specialized industrial company that manufactures products such as medical and scientific imaging equipment, pumps, and material analysis equipment.

Roper Technologies also develops software solutions for the healthcare, transportation, food, energy, and water industries. The company was founded in 1981, generates

around $5.5 billion in annual revenues, and is based in Sarasota, Florida.

On April 26th, 2022, Roper reported its Q1-2022 results for the period ending March 31st, 2022.

Quarterly revenues and adjusted EPS were $1.53 billion and $3.77, indicating a year-over-year increase of 11% and 10%, respectively. The company kick-started fiscal 2022 on a high note.

Specifically, Roper delivered 11% organic growth. It was driven by broad-based strength across its portfolio of niche-leading businesses and strong momentum fueled by double-digit software recurring revenue growth amid robust product demand.

Aided by its EBITDA growth of 8% during the quarter and its net debt reduction of approximately $3.6 billion, Roper lowered its net debt-to-EBITDA ratio to 1.9X from 3.1X at the end of fiscal 2021.

Roper continues to experience strong software recurring revenue momentum, high levels of demand, record levels of backlog, and favorable market conditions.

Combined with its balance sheet strength and a large pipeline of high-quality acquisition opportunities, management believes Roper is well positioned for continued double-digit cash flow growth.

As a result, the company raised its fiscal 2022 guidance, now expecting to achieve adjusted EPS between $15.50 and $15.75 (previously $15.25 to $15.55) for the full year.

Click here to download our most recent Sure Analysis report on ROP

Water Stock #6: A.O. Smith (AOS)

  • 5-year expected annual returns: 10.1%

A.O. Smith is a leading manufacturer of residential and commercial water heaters, boilers and water treatment products. A.O. 

Smith generates the majority of its sales in North America, with the remainder from the rest of the world. It has category-leading brands across its various geographic markets.

A.O. Smith reported its first quarter earnings results on April 28. The company generated revenues of $980 million during the quarter, which represents an increase of 27% compared to the prior year’s quarter. A.O. 

Smith’s revenues were up 32% in North America, while revenue growth was lower in the rest of the world, where sales during the quarter were up 15% year over year, with the lower growth rate being explained by factors such as COVID measures in China.

A.O. Smith generated earnings-per-share of $0.77 during the first quarter, which was up by 31% on a year over year basis. 

This can mostly be explained by the solid revenue performance, which lifted the company’s profits at a comparable level, despite commodity price headwinds.

A.O. Smith has also reaffirmed its guidance for 2022. The company is forecasting earnings-per-share in a range of $3.35 and $3.55, which reflects that management expects earnings-per-share to meaningfully grow this year, on top of the strong growth in 2021. 

At the midpoint of the guidance range, A.O. Smith’s earnings-per-share would rise by an attractive 14% compared to 2021.

Click here to download our most recent Sure Analysis report on A.O. Smith

Water Stock #5: Gorman-Rupp Co. (GRC)

  • 5-year expected annual returns: 10.2%

Gorman-Rupp began manufacturing pumps and pumping systems back in 1933. Since that time, it has grown into an industry leader with annual sales of about $405 million. Today, Gorman-Rupp is a focused, niche manufacturer of critical systems that many industrial clients rely upon for their own success.

GormanRupp generates about one-third of its total revenue from outside of the U.S. The company also has one of the most impressive dividend increase streaks in the market, which currently stands at 49 years.

Gorman-Rupp reported first quarter earnings on April 27th, 2022, and results were mixed. Earnings-per-share came to 29 cents, which was five cents lower than expected.

Revenue, however, was $102 million, which was up 15% year-over-year, and beat estimates by more than $4 million.

Net sales were 15.6% higher in the Domestic market, while international sales were up 12.8%. Sales were up in almost all markets for the company in Q1, and incoming orders were up 9.6% year-over-year to $112 million. Water markets revenue was up 11.5%, or $7.5 million.

Non-water markets revenue soared 23.3%, or $5.7 million.

Gross profit was $25.5 million in Q1, or 25% of revenue. That was up from $23 million on a dollar basis, but down from 25.9% as a percentage of revenue.

The decline of 90bps of revenue was attributable to a 200bps increase in cost of material, partially offset by a 110bps improvement in labor and overhead leverage, which was due to higher sales volume.

Click here to download our most recent Sure Analysis report on GRC

Water Stock #4: Stantec Inc. (STN)

  • 5-year expected annual returns: 10.6%

Stantec Inc. provides professional consulting services in the field of infrastructure and facilities internationally. This includes services in engineering, architecture, interior design, environmental sciences, project management, and project economics.

The company also undertakes water provision, transportation, and public works such as transportation planning and traffic engineering.

Finally, it serves the urban regeneration, infrastructure, education, and waste industries. Stantec generates around $3.6 billion in annual revenues and is based in Edmonton, Canada.

On May 11th, 2022, Stantec released its Q1 results for the period ending March 31st, 2022. Quarterly net revenues came in at $818 million, 19.5% higher on a constant basis year-over-year, reflecting 6.4% organic and 13.9% acquisition net revenue growth.

Adjusted net income increased by 21.9% to $53.3 million, or $0.61/share.

This resulted from project margin growth, offset by higher administrative, marketing, and interest expenses. Specifically, project margins grew by 90 basis points to 54%.

The company’s contract backlog increased to a record $4.21 billion, 6.8% higher compared to the previous quarter, including double-digit growth in the Energy & Resources and Environmental Services backlog. It represents about 14 months’ work.

For the full year, management expects net revenue growth between 18% and 22% and adjusted EPS growth between 22% and 26% in comparison to FY2021.

Accordingly, we estimate FY2022 adjusted EPS of $2.34, which is derived from: FY2021 adjusted EPS of CAD2.42 X 1.24 (midpoint of management’s guidance) X 0.78 (CAD/USD).

Note that all figures in the table below reflect GAAP EPS. We are utilizing adjusted EPS in estimating the company’s total return prospects.

Click here to download our most recent Sure Analysis report on STN

Water Stock #3: Algonquin Power & Utilities Corp. (AQN)

  • 5-year expected annual returns: 11.9%

Algonquin Power & Utilities Corp. trades on both the Toronto Stock Exchange and New York Stock Exchange under the ticker, AQN.

The renewable power and utility company was founded in 1988. The company has increased its dividend every year since 2011.

It has two business segments: regulated utilities (natural gas, electric, and water) and non-regulated renewable energy (wind, solar, hydro, and thermal). Combined, its entire portfolio has 4.3 GW of generating capacity that it aims to achieve 75% renewable energy generation by 2023.

Algonquin serves more than 1 million connections primarily in the U.S. and Canada.

It also has renewable and clean energy facilities that are largely (about 82%) under long-term contracts of ~12 years with inflation escalations.

Algonquin reported its Q1 2022 results on 05/12/22. For the quarter, revenue rose 16% to $735.7 million, adjusted net earnings climbed 13% to $141.3 million, adjusted earnings-per-share (“EPS”) rose 5% to $0.21, and adjusted EBITDA, a cash flow proxy, increased by 17% to $330.6 million, against Q1 2021.

The utility also increased its quarterly dividend per share (“DPS”) by 6.0% from $0.1706 to $0.1808, which equates to an annualized payout of $0.7232.

The utility continues to grow its scale steadily. In January, Algonquin closed the acquisition of New York Water.

Then, it completed the 175 MW Blue Hill Wind facility in Saskatchewan, Canada, which came into service about mid-April.

This month it received approval by the Kentucky Public Service Commission to acquire Kentucky Power that it announced in October 2021. We maintain our 2022 EPS estimate of $0.74.

Click here to download our most recent Sure Analysis report on AQN

Water Stock #2: SABESP (SBS)

  • 5-year expected annual returns: 13.0%

SABESP is one of the world’s largest water supply, sewage collecting, and treating companies, serving 28.4 million people.

The company operates in a natural monopoly, serving the City of Sao Paulo and 375 out of the 645 municipalities in the state, covering around 70% of its urban population.

It has a total water treatment capacity of 81.7 (m³/s) and generates around $3.4 billion in annual revenues. SABESP is based in Sao Paulo, Brazil.

On May 6th, 2022, SABESP reported its Q1 results for the period ending March 31st, 2022. Revenues came in at $1.03 billion, 4.1% higher year-over-year in constant currency.

The increase was driven by positive tariff adjustments and a higher average tariff per customer due to the increase in the billed volume in the Commercial and Public categories.

Earnings per share (ADR) came in at $0.30, a significant improvement from last year’s $0.13. A nearly $155 million reduction in exchange variations on borrowings and financing significantly boosted the bottom line.

Specifically, SABESP’s debt denominated in foreign currency accounted for 15% in March 2022 versus 21% in March 2021.

We now forecast fiscal 2022 EPS of $0.88, though this figure can be affected by multiple factors, including currency fluctuations.

In line with its dividend policy, SABESP intends to distribute exactly 27.9% of its net income for the year, as it has done since 2012. The company is to pay a DPS amounting close to $0.17 for FY2021 on July 7th, 2022.

Click here to download our most recent Sure Analysis report on SBS 

Water Stock #1: Pentair plc (PNR)

  • 5-year expected annual returns: 13.9%

Pentair operates as a pure–play water solutions company with 3 segments: Aquatic Systems, Filtration Solutions, and Flow Technologies. Pentair was founded in 1966.

Pentair has increased its dividend for more than four decades in a row, when adjusted for spin–offs.

Pentair reported its first-quarter earnings results on April 21. Revenues of $999 million rose 15% year-over-year, and beat estimates easily. Core sales, which excludes the impact of currency rate movements, acquisitions, and dispossessions, were up 12% year over year.

Pentair recorded earnings-per-share of $0.85 for the first quarter, which was up by 5% year over year. Pentair’s earnings-per-share beat the analyst consensus by $0.04.

Pentair reiterated its guidance for the current year during the earnings report.

For fiscal 2022, Pentair is forecasting earnings-per-share in a range of $3.70 to $3.80, which indicates solid earnings-per-share growth of around 13% compared to the $3.32 the company earned in 2021. 2022 will also be a new record year for the company, adjusted for the nVent spinoff, according to management.

Total returns are expected to reach 13.9% over the next five years.

Click here to download our most recent Sure Analysis report on Pentair

Final Thoughts on Best Water Stocks

Water could be one of the biggest investing themes over the next several decades. An increasing global population is only going to cause demand for water to rise in the future.

And, given the fact that water is a necessity of human life, demand for water should hold up extremely well, even during the worst recessions.

Therefore, young investors with a longer time horizon such as Millennials should consider water stocks.

These factors make water stocks appealing for risk-averse investors looking for stability from their stock investments.

Not all the water stocks on this list receive buy recommendations at this time, as some appear to be overvalued today. But all the water stocks on this list pay dividends and are likely to increase their dividends for many years in the future.

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Disclosure: The author is not a licensed or registered investment adviser or broker/dealer. They are not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.

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Tim Thomas has no positions in the stocks, ETFs or commodities mentioned.

This post was produced by Sure Dividend and syndicated by Tim Thomas / Timothy Thomas Limited.

Featured image credit: Shutterstock.