When many investors think about clean water stocks, the first thing that comes to mind for many investors is utility stocks. And hey, in today’s volatile market, the relative safety and security that comes from owning utilities is not a bad idea.
But if you’re an investor looking for growth, you’ll be looking for more options. Right now, there are several interesting water stocks to consider. That’s because as you probably learned in school, only about 1% of the total water supply is drinkable. And some analysts predict that by 2025 as much as two-thirds of the world will face a shortage of freshwater.
Many of us don’t think much about water. But several geographies of the world, including areas right here in the United States, are dealing with multi-year droughts. In parts of Arizona, California, and Nevada, water levels are at historic lows. Accordingly, the federal government is threatening to cut water use by 25%.
In this article, I’ll highlight seven clean water stocks that are using clean water technology to address this ongoing crisis.
|American Water Works
|Primo Water Corporation
American Water Works (AWK)
First on this list of clean water stocks is one of the largest water utilities in the country. American Water Works (NYSE:AWK) is a regulated monopoly. That means it doesn’t have competition in the areas it serves. However, in return, its prices are regulated. The company does business in 14 states and serves a total of more than 3 million customers. That’s a good predictor of future revenue and earnings, because its customers have to pay their utility bills.
And American Water Works isn’t standing still. The company plans to spend between $22 billion and $25 billion making strategic capital investments to continue to grow its business through acquisitions.
Investors certainly pay a premium to own AWK stock. Although the company’s current price-earnings ratio of around 20-times may seem attractive to some, it’s expensive relative to the broader market. That said, this higher multiple is somewhat offset by an attractive dividend which American Water Works has been increasing for the last 13 years, which is also supported by a sustainable payout ratio of around 36%.
Essential Utilities (WTRG)
Essential Utilities is a diversified operation, and is also the parent company of Peoples Natural Gas. This has added volatility to the stock in recent years, with significant price volatility in 2021 turning into tailwinds in 2022 as the price of natural gas spiked following the Russian invasion of Ukraine. With natural gas prices expected to stay elevated for the next few years, this will be a bonus to shareholders considering WTRG stock for its diversified commodities exposure.
Additionally, the company continues to showcase a strong balance sheet. Essential Utilities is trading at around 25-times earnings,which is a value compared to the sector average which is about 35-times earnings. Essential Utilities is also a dividend aristocrat, having increased its dividend in each of the last 31 years. Finally, the company’s current 2.5% dividend yield is supported by projected earnings growth of about 7% over the next five years.
Danaher (NYSE:DHR) makes this list of clean water stocks because one of the company’s revenue drivers comes from providing water testing equipment. And if Danaher is correct in citing that nearly 33% of the global population lacks access to clean drinking water, then its potential growth prospects may be even greater than current investors envision.
This water exposure also provides an even larger addressable market for the company. Currently, water testing equipment accounts for nearly 10% of the company’s revenue today. However, this percentage continues to climb both quarterly and year-over-year. For the next five years, the company’s revenue and earnings are both expected to climb somewhere in the high single digits. But if water testing becomes the revenue driver that the company expects, Danaher’s revenue may approach its historical 12% annual revenue growth level.
DHR stock is down approximately 4.4% over the last 12 months which puts it in line with the S&P 500. Danaher has a moderate buy rating and a price target of just over $300. That represents a gain of approximately 20% from the current stock price.
Pentair (NYSE:PNR) is next on this list of clean water stocks. The company provides exposure to many of the same business lines as other companies on this list, such as water treatment, energy-efficient water treatment, water systems, and pumps. However, the reason it makes this list is due to the way the company can help address the current issues with our global water supply. The company features a countertop water filtration system, the Pentair Countertop Drinking System, that can help reduce the need for plastic water bottles. In addition to providing filtered water from the tap, it’s expected this product will contribute to the growth of the growing circular economy.
PNR stock is up about 24% in 2023, and if the company continues its recent pattern of delivering higher year-over-year revenue and earnings, there may be more upside than the 6.5% consensus price target of analysts. Plus, Pentair is another dividend aristocrat, having increased its dividend in each of the last 48 years.
Consolidated Water (CWCO)
I need to give credit to my InvestorPlace colleague Josh Enomoto who recently wrote about Consolidated Water (NYSE:CWCO). Much of what the company does is not distinguishable from other water utilities. However, the company is heavily involved in the process of desalination.
If 97% of the world’s water is salt water, then it stands to reason that companies involved in desalination will have a distinct advantage. And Consolidated already appears to have a first move advantage with the work its doing, and/or financing, in the Caribbean.
CWCO stock is a small-cap option in this space, which means it could be more volatile. That said, this stock has been around since 1995. Accordingly, investors have a decent track record to follow. In addition to being up 17% over the last year, analysts suggest the stock may have 30% more upside. And with projections of average earnings per share gains of 177% for the next five years, that may be a low estimate.
Primo Water Corporation (PRMW)
When it comes to pure-play water stocks, it doesn’t get much purer than Primo Water Corporation (NYSE:PRMW). One of the company’s signature products is its exchangeable water tanks that are available at many big-box states.
PRMW stock is up just 9% over the last five years. But that’s to be expected, because the company has been going through a transformation. It sold off its coffee and tea business in 2020. And in 2021, Primo announced it was exiting the single-use bottled water business at retail locations in the United States. That will not only endear the company to the ESG crowd, but it will also boost the company’s bottom line.
Analysts expect Primo Water to grow earnings at an average of around 24% annually per year. The company is also expected to be one of the beneficiaries of the recently-passed Infrastructure Act.
Last but not least on this list of clean water stocks is Xylem (NYSE:XYL). Xylem is a water technology company that manufactures a wide range of products “designed to ensure that water and wastewater treatment equipment keeps running at its best.”
For example, a common problem that Xylem can help address is leaky pipes. The average water main in the United States is likely to be over 50 years old. That means the company may well benefit from the Infrastructure Act passed by the U.S. Congress in 2022.
XYL stock is up 17% in the last 12 months and is up 39.9% in the last five years. That’s pushing XYL stock up against analysts’ forecasts. The company’s consensus price target suggests the stock has about an 11% upside. However, Xylem also has a dividend that has been increasing for the last 12 years. Accordingly, considering the fact that Xylem is projected to post double digit earnings growth over the next five years, I think XYL stock is a solid long-term choice for patient investors.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.