Water is the natural resource that holds the highest significance globally. Because of its limited availability, it should come as no surprise that many traders and investors have already begun investing in water stocks and ETFs, even though water is not considered a commodity in trading gold or oil. This trend has been going on for some time. To name just a few, the exponential rise in the world's population, the increase in the use of intensive farming practices, and global warming are just some of the causes that have contributed to the scarcity of water as a resource and as a result, its potential value as an investment opportunity. Keep reading to see how you can trade on the price movements of water stocks using our derivative products, and continue to discover how you may change on these price fluctuations.
Even though the market provides investors with access to a diverse selection of water utility companies worldwide, anyone interested in investing in drinking water stocks should carefully consider their options. Because water firms are susceptible to periods of financial debt, interest rates are another factor that needs to be carefully considered. It is best to put your money into businesses that can demonstrate a better consistency in their operations. Traders should also pay special attention to currency exchange rates while investing in a geographically diversified portfolio. It is possible for the value of foreign currencies like the Chinese yuan, the British pound, and the US dollar to decrease, which is necessary for the fund's expansion but can be an upsetting experience.
Why Invest in Water Stocks?
Only one percent of the water on our planet is potable, even though water covers around 80 percent of the world's surface. According to the World Health Organization (WHO), one billion people do not have access to potable water, and between three and four billion people do not have access to water supplies that are sufficient or reliable. In addition, the OECD projects that the global water demand will rise by 55 percent between now and the year 2050; yet, at least two-thirds of the world's population may already be in a situation of "water stress" by the year 2025. Even more dismal is the prognosis provided by the United Nations, which projects that the need for energy would contribute to an increase in water use that is 85 percent higher by the year 2035.
More and more countries are conscious of the implications of water but handle its management in their distinctive method. In the past, public ownership and control of water businesses ensured that the general population had access to this vital resource at prices that were more affordable to them. Nevertheless, water businesses have increasingly transitioned over to the private sector in many different places.
Some nations have been more open to the concept of privatization than others. For instance, most of the United Kingdom's water resources are still managed by the government, but in other countries, the water market has been completely privatized. While some nations favor public-private partnerships, certain nations favor the practice of letting private businesses run the entirety of the network. Understanding the investment characteristics of diverse stocks is as critical as knowing that every country has its distinct regulatory framework. The water utility industry is generally considered a steady one that is significantly less prone to volatility. Because of this feature is particularly well-suited for use by position traders and investors with a long-term horizon.
Another significant advantage of water utilities is the substantial amount of dividends they payout. Because of this, investors should always pay great attention to the policies governing stock dividends and compute the dividend yield when attempting to determine whether or not a stock is expensive.
Should You Invest in Water?
The combination of warmer temperatures and the increased population leads to water shortages from California to South Africa. The World Health Organization's 2019 report found that thirty percent of the world's population does not have access to clean water for drinking. And if significant investments are not made in the world's infrastructure, the 2020 Water Climate Report predicts that up to forty percent of the world's population will be without access to water by the year 2050. At the same time, problems such as outdated infrastructure contribute to the loss of up to forty billion dollars' worth of pure water each year.
The Environmental Protection Agency (EPA) will receive $55 billion due to the Infrastructure Law to develop infrastructure relating to both drinking water and wastewater. The monies will become available in installments spread out over five years, and this is excellent news for equities pertaining to water infrastructure.
American Water Works (NYSE: AWK), the most well-known name among direct-play water stocks, is an excellent investment opportunity for the resource sector. The AWK programming language is regarded as a reliable standard despite having a history that dates back to the late 19th century. While new consumer goods and technologies are constantly being developed, nobody has yet come up with a solution to our water needs. Until then, you could have the impression that investing in AWK for the long run is not too difficult.
In addition to this, it would appear that stock prices are reacting to recent occurrences. AWK, along with the vast majority of other publicly traded securities, did not get off to a good start in 2022. But beginning about the middle of February, the stock price began to climb again. And the geopolitical flashpoint in Ukraine served to fuel AWK's permanently relevant business profile, which offers water utility services predominantly to the eastern part of the country. [citation needed]
2. California Water Service (CWT)
Even though California is a state that many people travel to visit, the cost of living there is extremely high due to the state's stunning natural scenery and the nearly constant presence of sunlight. The rising expense of life is becoming increasingly linked to the scarcity of water supplies. A scientist from the Central Sierra Snow Lab at the University of California, Berkeley, recently had an opinion published in the New York Times. In the piece, the scientist argued that the present drought conditions in California might be more severe than initially predicted.
It is difficult to argue against this idea when one considers that naturally occurring processes like rainfall have not changed in a way that is beneficial to alleviating the drought. Even though this does not provide much solace directly, investors may wish to protect themselves against this unfavorable environment by purchasing California Water Service (NYSE: CWT). CWT, a utility company that provides services for both drinking water and wastewater, should be on your list of water stocks to purchase because of its irrefutable relevance.
Users are forced to pay for the service, just like they would for any other necessary good or service. You can be sure that people will behave in this manner, given that the economy of the Golden State is the largest in the United States.
3. York Water Company
The oldest investor-owned water company in the United States is the York Water Company, established in 1816. The corporation obtains, filters, and distributes drinking water throughout the three counties in the middle of Pennsylvania's south-central region. Additionally, it owns two wastewater collection systems and five facilities that collect and treat wastewater.
York's expansion as a water utility depends not just on the number of users but also on the water and wastewater prices charged. The corporation cannot exert direct influence on overpricing, so expanding its customer base is the most effective way for it to expand its operations.
Although York Water operates in a country region with one of the lowest growth rates, the company has made several acquisitions in its jurisdiction to improve growth. The company's overall number of customers by the end of 2021 was 73,144, which is a modest rise from the 71,411 counts at the end of 2019.
Its revenue in 2021 climbed to $55.1 million, an increase of 2.3 percent. The operating margin for the company is at a very healthy 42 percent, and the company is likewise quite profitable. Investors may anticipate a consistent flow of dividend payments from York Water as the company has a payout ratio of approximately 60 percent, which results in a dividend yield of 1.8 percent.
4. Essential Utilities
Essential Utilities, usually known as Aqua America, is a utility company that provides water and natural gas to around 5 million customers under the brand names Aqua and Peoples.
The company's roots are in the southeast corner of Pennsylvania, where it operates as a utility. Today, it has expanded its operations to ten other states, and its primary areas of concentration are regulated water and wastewater and other utilities. They entered the natural gas sector in 2020 by acquiring Peoples Natural Gas firm, which provided it with 750,000 clients in three different states who used gas utility services.
Essential Utilities' revenue presently derives primarily from water, with natural gas accounting for one-third of the company's earnings. The original objective of this company is to concentrate its expansion efforts on business domains in which it already has a substantial presence to achieve economies of scale and improve operational efficacy.
Rising rates and business acquisitions, such as those in the natural gas industry, helped push revenue up by 28 percent in 2021 to $1.88 billion. Historically, residential water companies have increased revenue by about 1 percent per year, reminding us that the utility industry is typically a slow-growth industry. The profit margin for the company is currently around 23 percent, making it an extremely profitable business. Essential Utilities has a lengthy history of increasing its dividend payment to shareholders, and the company's current dividend yield is 2.2 percent.
5. 3M (MMM)
When you think of the applied-sciences company 3M, you probably remember their famous Post-it Notes or one of its other items for the office. But is one of the stocks to buy related to water? Something like that would not be included in MMM's profile in a typical scenario. The fact that you can establish a presence in several different markets is, however, one advantage associated with having a vast conglomerate, even though it may be pretty perplexing.
Concerning being exposed to water stocks, 3M produces several beverage application filtrations and water treatment systems that may be used in either a household or commercial setting. Because of the increasing population in the United States and worldwide, 3M is well-positioned to succeed in the long term. Having access to water is simply one of several challenges, after all. The other half, ensuring its security or using it in a proper manner, is a component that 3M can address.
MMM is not one of the most exciting water stocks, mainly because it is not a direct play, and this is quite understandable. On the other hand, having various company arms may make it one of the most reliable options.
6. Middlesex Water Company
Since its founding in 1897, Middlesex Water Company has been managing regulated water and wastewater utility systems in New Jersey and Delaware. Those two states account for around 115,000 of the company's clients.
The revenue Middlesex has brought in over the previous five years has been relatively constant, growing from $132.9 million in 2016 to $143.1 million in 2021, an increase of just under 1 percent annually. The company has not attempted to expand through mergers or acquisitions, and as a result, its operating income has remained relatively constant. It sold a wastewater facility in Delaware in 2021, and in reaction to the Tax Cuts and Jobs Act of 2017, rates were lowered in one of its areas. This was because the company's overall tax obligations dramatically decreased after the bill was signed into law.
Middlesex anticipates that its net income will be influenced by the following four factors: the weather, price relief, effective cost administration, and client growth.
Over many years, the company's stock has consistently increased its dividend payment while maintaining its status as a trustworthy dividend payer. As of the end of March 2022, the dividend yield on Middlesex was 1.1 percent. It has a payout ratio of about 60 percent, which indicates that it should have little trouble increasing its dividend in the years to come.
7. Xylem
Xylem is not a water utility but rather a corporation specializing in water technologies. It manufactures a wide variety of devices, including pumping and heating, handling the transportation and purification of water, and providing a measurement for meters and data analytics.
Due to the singularity of its business strategy, Xylem does not have a single direct opponent; instead, it competes with a diverse group of businesses across each of its three business divisions. It estimates that its total served market is sixty billion dollars in the segments that fall under a bigger addressable market that is six hundred billion dollars in the water business worldwide.
The business anticipates potential in developing countries' markets due to the increased availability of clean water brought about by technological advancement.
The performance of Xylem in 2020 was adversely affected by COVID-19, as evidenced by a decline in revenue of 7 percent to $4.9 billion; however, the firm returned to growth in 2021, with revenue increasing 7 percent to $5.2 billion, or 4 percent organic growth.
Throughout its history, Xylem has maintained a consistent record of profitability, despite fluctuations in its profits. Earnings per share reached their all-time high of $3.03 in 2018, but they dropped down to $1.41 in 2020 due to the fall in revenue and the increase in expenses. The recovery from the pandemic saw a rise in earnings per share, which brought it back up to $2.35. Since its initial public offering in 2011, Xylem has maintained a consistent pattern of dividend increases, and the company today has a dividend yield of 1.4%.
8. The Primo Water Corporation (PRMW)
PRMW provides customers with bottled water under various brand names, such as Earth2O, Crystal Springs, Sierra Springs, Mountain Valley, and Deep Rock. In addition, the water sells filtration equipment and coffee and water dispensers. PRMW recently announced its full-year results in February, which included an increase in revenues of 6 percent, from $1.95 billion to $2.07 billion, and a 5% increase in EBITDA (profits before interest, taxes, depreciation, and amortization) from $362 million to $380 million. Both of these figures are in comparison to the previous year's results. In addition, the corporation repurchased roughly 2.6 million shares of stock at the cost of $44 million. The management team issued some projections for 2022, noting that they anticipate revenue growth of 9 to 10 percent and adjusted EBITDA in the range of $410 million to $420 million. If you want to learn if PRMW will be able to deliver on this guidance, the earnings call in the first quarter of 2022 will take place on May 12, before the market opens.
9. Invesco Water Resource ETF (PHO)
PHO follows the NASDAQ OMX U.S. Water Index, in contrast to CGW, which concentrates on the stocks of 38 U.S.-listed firms active in the conservation or purification of water for commercial or consumer usage. Once again, American Water Works has the highest stake, with a weight of 8.7 percent. Roper Technologies Inc. (ROP), Ecolab Inc. (ECL), Danaher Corp. (DHR), and Xylem are the companies with the following most enormous weights. PHO is mainly composed of industrial companies, which account for close to 57 percent of the exchange-traded fund. After industrials, utilities have the greatest sector weighting at 19.9 percent, and then health care comes in at 11.9 percent. The ETF has generated returns of 17.3 percent, 16.5 percent, and 12 percent, respectively, looking back over the preceding three, five, and ten years. PHO has an expense ratio of 0.6 percent and a 30-day SEC yield of 0.4 percent. The expenditure ratio is lower than the yield. Since its debut, the exchange-traded fund has amassed a total of $1.7 billion in assets that are under administration.
10. PepsiCo (PEP)
PepsiCo (NASDAQ: PEP), best known for its sugary beverages, is yet another company whose name appears on a list of water stocks that doesn't necessarily ring as relevant. In addition to this, it has a long-standing and legendary rivalry with a competing beverage company that I will not name, but you are fully aware of whom I am referring to here.
Aquafina, a brand owned by PepsiCo, is involved in the consumer retail water market, despite the company's more well-known image. Aquafina has maintained its position as the leading brand of water bottles, outperforming many prominent rivals in the process. Nevertheless, one must ask: in light of spiraling inflation being a problematic issue, is it possible that PEP may lose part of its allure?
I'm not going to provide you with many items made from bovine meat and act like it's not a big deal. However, the extensive installation of lockdowns and regulations in response to the coronavirus pandemic has resulted in a widespread incidence of cabin fever, which deserves mention. As a result, the increasing mobility of people – particularly within entertainment venues – may increase PEP.
Top Water ETFs to Trade
Lyxor World Water
An exchange-traded fund known as Lyxor World Water aims to produce results that are identical to those of the SGI World Water index CW. The performance of the 20 largest firms operating in water services, water infrastructure, and water treatment is reflected in the basket, which is used as a reference index unique to the water industry and serves as a benchmark for the sector.
Guggenheim S&P Global Water Index
One of the most significant exchange-traded funds (ETFs) currently available, the Guggenheim S&P Global Water Index ETF, tries to replicate the S&P Global Water index. This index gives investors exposure to 50 companies located worldwide that are active in water-related businesses. Fifty different securities make up S&P Global Water, aiming to provide a balanced representation of diverse sub-industries within water's remit. These are comprised of the 25 water utility and infrastructure firms and the 25 water equipment and material companies, which are organized into two distinct clusters.
Final Thoughts
The first thing you should consider is to decide whether you want to spread bet or trade CFDs when it comes to trading water stocks' fundamental price fluctuations. Visit our article on spread betting vs. CFDs to determine which product is best suited to your trading personality and the overall aims you wish to achieve.
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