Water management is not a very exciting subject. Unless a toxic wastewater pond overflows or a city’s drinking water is contaminated, we don’t hear much about the business of getting potable water into our homes or taking it away.
In fact, it’s a huge business and growing at a steady rate of 6.5 per cent annually, according to a report published last year by London-based Meticulous Research. In it, the firm estimates that the global market for water and wastewater treatment could be worth US$211.3-billion by 2025.
“Growing global demand for clean water, more stringent regulatory issues, and increasing environmental concerns make water and wastewater treatment systems more relevant than ever,” the report says, citing, among other factors, urbanization, an increasing prevalence of water-borne diseases, and growing industrial demand.
The report goes on to note that the “high cost of equipment, operations, and disposal obstructs the growth of this market to some extent. In addition, aging water infrastructure, excess energy consumption, and rising expenditure due to excess sludge production are some of the major challenges in the overall water and wastewater treatment market.”
Despite the obstacles, a few investors have discovered that water-based investing can offer slow but steady growth potential and respectable cash flow. But most ignore the sector or only have exposure to it through an infrastructure fund.
Here are three ways you can invest in the water industry.
Xylem Inc. (XYL-N)
Based in Rye Brook, N.Y., Xylem is a leading global water technology provider, enabling customers to transport, treat, test and efficiently use water in public utility, residential and commercial building services, and in industrial and agricultural settings. It makes pumps and control systems used in the management of wastewater and the collection and distribution of drinking water. It also offers smart metering, network technologies and advanced data analytics for water, gas and electric utilities. Xylem does business in more than 150 countries.
The stock has been a strong performer over the past year, almost doubling from its 52-week low of US$56.63 to close on Monday at US$108.21. The stock was first recommended in my Internet Wealth Builder newsletter in May, 2015, at US$37.14.
The company’s fourth-quarter and fiscal 2020 financial results beat expectations, despite the economic impact of the pandemic. Revenue in the final quarter was US$1.37-billion, slightly higher than the same period in 2019. Net income was US$148-million (82 US cents a share) compared with US$118-million (65 US cents) in the same quarter of 2019.
For the full year, Xylem reported revenue of almost US$4.9-billion, down from US$5.2-billion in 2019. Net income was US$254-million (US$1.40 a share), down from US$401-million (US$2.21) in the prior year.
The company announced an 8-per-cent increase in the quarterly dividend, the 10th year in a row it has hiked its payout. The new rate is 28 US cents a share (US$1.12 annually) for a yield of 1 per cent.
Xylem is forecasting a strong year in 2021, with revenue up between 6 per cent and 8 per cent. It is forecasting adjusted earnings per share of between US$2.35 and US$2.60.
American Water Works Co. (AWK-N)
This company, which traces its history back to 1886, is the largest and most geographically diverse U.S. publicly traded water and wastewater utility. It employs more than 7,000 people who provide regulated and market-based drinking water, wastewater and other related services to more than 15 million consumers in 46 states.
The business involves the ownership of water and wastewater utilities that provide services to residential, commercial and industrial customers.
The stock has had a choppy year, but the overall trend has been up. The shares did not drop below US$100, even during the market plunge of March, 2020. They closed Monday at US$158.72.
Fourth-quarter and year-end results for 2020 were impressive. Operating revenue for the final quarter was US$923-million, up from US$902-million in the prior year. Net income attributable to common shareholders was US$145-million (80 US cents a share, fully diluted), a healthy increase from US$98-million (54 US cents).
For the full year, American Water Works reported revenue of almost US$3.8-billion, up from about US$3.6-billion the year before. Net income was US$709-billion (US$3.91 a share) compared with US$621-million (US$3.43) in 2019.
The company is projecting 2021 earnings per share between US$4.18 and US$4.28, and a five-year annual compound growth rate of 7 per cent to 10 per cent.
The stock pays a quarterly dividend of 55 US cents a share (US$2.20 annually) to yield 1.4 per cent.
iShares S&P Global Water Index ETF (CWW-T)
If you’d prefer to put your money into a diversified fund rather than individual stocks, this is a good choice. It was recommended in my Income Investor newsletter in July, 2013, at $19.65. The units closed Monday at $48.80.
This ETF provides exposure to 50 companies from developed markets on the basis of their relative importance to the global water industry. These include water utilities, infrastructure companies and those involved in the manufacture and distribution of equipment. About half the portfolio is invested in U.S. companies. The U.K. accounts for 13.2 per cent, France 9 per cent and Switzerland 7.4 per cent. Canada represents 3.6 per cent of total investments.
The top two companies in the portfolio are those mentioned above: Xylem (9.3 per cent) and American Water Works (8.4 per cent). Rounding out the top five are France’s Veolia Environnement SA (5.4 per cent), Pentair PLC (5 per cent) and U.K.-based Halma PLC (4.7 per cent).
The fund has been a strong performer. The one-year return to March 31 was 31.8 per cent and the 10-year average annual compound rate of return was 13.4 per cent. Since our original recommendation in 2013, we have a capital gain of 148 per cent, plus distributions.
Those distributions are paid quarterly, and the amount varies considerably. The trailing 12-month payout to the end of March was 59.4 cents for a yield of 1.2 per cent at the current price.
The fund was launched in June, 2007, and has about $279-million in assets under management. The management expense ratio is on the high side, at 0.66 per cent, but the high return makes the expense worthwhile.
I view these as relatively low-risk securities, suitable for conservative portfolios.
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