Water is one of the most essential resources for survival, yet it is also a finite and increasingly scarce resource. More than 70% of the earth’s surface is covered in water. However, the vast majority is salt water, and the available fresh water represents just 0.5% of the entire planet’s water supply. As a result, water utility companies play a vital role in ensuring that everyone has access to a clean, predictable source of this crucial resource. So it’s understandable why water utility stocks have been one of the go-to places for investors who put their money to work. With an unending demand for clean water and a continuously growing population, it makes sense for demand to grow as well.
What are Water Stocks?
The stock market is made up of 11 official market sectors, and waters stocks fall under the “Water Utility,” which is a subcategory of the broader Utility sector. Water utility companies generally earn the majority of their revenue by providing water, related engineering services, and wastewater. Recent reports from the World Economic Forum estimate the global water industry at $483 billion as of mid-2022.
Why invest in Water Stocks?
Water stocks is a sector that involves companies that have histories dating back to the 1800s. The water utility industry has proven to be a source of relatively stable, predictable businesses that have generated above-average returns for decades. The businesses underlying the best water utility stocks have mastered their operations to drive consistent (sometimes modest) earnings growth and healthy dividend payouts regardless of inflationary pressures and operating costs. It provides investors with ways to invest in a sector that will always be in demand regardless of the market. In addition, other key factors that make investors choose water utility stocks are:
Long-term growth potential
With a growing population comes growing demand. This demand creates a long-term growth potential for water utility stocks and offers investors significant returns over time.
Environmental concerns
As the market continues to focus on sustainability and the effects of business on the environment, so does the focus on sustainable water management. Investing in water utility stocks can offer investors a way to support companies that are working to manage and conserve water resources.
Risks of investing in Water Utility Stocks
Even with the attractiveness of water stocks, investors should still be wary of their risks. The water utility industry is capital-intensive and requires significant investments to maintain its operations and infrastructure at scale. In addition, the water utilities sector also faces increasing regulatory risks. For example, public utility commissions can affect profitability if they determine that water utilities under their jurisdiction should shoulder operational costs and avoid passing them to customers. There are also concerns about the quality and affordability of potable water due to its scarcity worldwide and the potential for contamination events. In addition, other risk factors investors can also consider that can potentially hinder growth are:
Geographic location
The location of the water utility company can also be an important factor to consider. For example, if the company operates in areas with high population growth or higher water scarcity can provide higher growth potential due to demand. Hence, it is important for investors to also look at where these companies are operating. In addition, investors should also be aware of any potential contamination risks in the area where the companies operate.
Technology and innovation
Innovation isn’t a key selling point of Water Utility companies, but it is an important factor to look at as a company’s investment in technology and innovation can impact the company’s future growth potential. Water utility companies that are investing in technology and innovation to improve water management and conservation may have a competitive advantage over their peers.
Top Buy-Rated Water Stocks to consider
With all these in mind, let’s look at top water utility stocks based on analyst recommendations that investors can start looking into.
Middlesex Water Co. (MSEX)
Middlesex Water Company is a water utility company that owns and operates regulated water utility and wastewater systems primarily in New Jersey and Delaware. The company also operates water and wastewater systems under contract on behalf of municipal and private clients primarily in the same area. The Company operates through two segments:
Regulated – this segment is engaged in the business of collecting, treating, and distributing water on a retail and wholesale basis to residential, commercial, industrial, and fire protection customers in parts of New Jersey and Delaware.
Non-Regulated – this segment primarily consists of non-regulated contract services for the operation and maintenance of municipal and private water and wastewater systems in New Jersey and Delaware.
The Company also owns subsidiaries Tidewater Utilities, Inc. (Tidewater), Southern Shores Water Company, LLC (Southern Shores), and White Marsh Environmental Systems, Inc. (White Marsh).
Analyst Rating
Analysts are giving MSEx a “Strong Buy” rating which is from Baird R W and Janney Mont.
Consolidated Water Co Ltd. (CWCO)
Consolidated Water Co. Ltd. is a Cayman Islands-based water solutions company that develops and operates water supply and treatment plants and water distribution systems. Its segments include bulk, retail, services, and manufacturing.
Retail – operates the water utility for the Seven Mile Beach and West Bay areas of Grand Cayman Island.
Bulk – supplies potable water to government utilities in Grand Cayman and The Bahamas through long-term contracts.
Services – designs, constructs and sells water infrastructure and also offers management and operating services to third parties.
Manufacturing – manufactures and services a range of custom and specialized water-related products applicable to commercial, municipal, and industrial water production, supply, and treatment. They produce potable water from seawater and sell this water to a variety of customers, including commercial and tourist properties, residential properties, and government facilities.
Analyst Rating
Analysts rate CWCO as a Strong Buy based on recommendations from Janney Mont, Roth Capital PA, and Zacks Research.
Global Water Resources Inc. (GWRS)
Global Water Resources, Inc. is a water resource management company that owns, operates, and manages water, wastewater, and recycled water utilities in strategically located communities, mainly in metropolitan Phoenix and Tucson, Arizona. The Company aims to deploy an integrated approach, known as Total Water Management.
Total Water Management is the company’s approach to water utility management that helps reduce demand on scarce non-renewable water sources and costly renewable water supplies. It treats water to potable standards, and it also treats, cleans, and recycles wastewater for a variety of non-potable uses. The company’s water supply is primarily derived from groundwater. It owns and operates about 29 water and wastewater systems in strategically targeted communities in metropolitan Phoenix and Tucson.
Analyst Rating
Analysts rate GWRS as a Strong Buy based on recommendations from Roth Capital PA and Janney Mont.
Artesian Resources Corp (ARTNA)
Artesian Resources Corporation is a holding company that offers water, wastewater, and other services in Delaware, Maryland, and Pennsylvania. The Company operates its businesses primarily through the Regulated Utility segment. This includes an aggregation of its five regulated utility subsidiaries that are in the business of providing regulated water and wastewater services on the Delmarva Peninsula. Its regulated water utility services include treating, distributing, and selling water to residential, commercial, governmental, industrial, municipal, and utility customers throughout the State of Delaware and in Cecil County, Maryland, and to a residential community in Chester County, Pennsylvania. The company’s regulated wastewater utility services include the treatment and disposal of wastewater for customers in Sussex County, Delaware.
Analyst Rating
Currently, only 1 analyst is covering ARTNA which is Janney Mont. Janney Mont. is rating ARTNA a Strong Buy.
York Water Co.(YORW)
The York Water Company is an investor-owned water utility that has the primary business of impounding, purifying to meet, or exceed safe drinking water standards, and distributing water. The company also owns and operates three wastewater collection systems and eight wastewater collection and treatment systems. The Company operates within its franchised water and wastewater territory that covers portions of approximately 54 municipalities within three counties in south-central Pennsylvania.
Analyst Rating
Currently, only Janney Mont is covering YORW and gives a Strong Buy recommendation to the company.
Final Thoughts
Water utilities stocks are often mature and slow-growing companies that have delivered solid returns for investors for many years. It’s due to the nature of the business being an important commodity with high operating costs. However, in times when investors are highly defensive, water utilities became one of the attractive investments for investors due to their defensive and stable nature. Investors should always remember to understand the business, and the market and that these types of companies may not accelerate the growth of your portfolio, but they can help weather the storm that our current environment is in.
