7 Best Water Stocks for 2023 | The Motley Fool (2024)

Water may be a commodity that you don't think about when it comes out of the tap, but water is essential to life. Not only that, it's a multibillion-dollar industry in the business world.

Investing in water stocks

Why should you consider investing in water stocks?

Water is a key input in everything from food and beverages to the cleaning of semiconductor wafers and hydraulic fracturing (fracking). The sourcing, purification, and distribution of water is big business around the world, and the threat of climate change makes that more true now than ever.

Many climate scientists expect droughts to become more common in the coming years, and more extreme weather events are likely to make the price of water go up. Some believe that mass desalination, or the removal of salt from ocean water, will be necessary to ensure an adequate global water supply.

Whatever happens, demand for the resource is increasing while the supply is limited. That means now is a great time to consider investing in water stocks since water technology is advancing and the challenge of the climate crisis is likely to spawn further innovations.Most water stocks are utilities, although some can be classified as consumer staples stocks.

If you're looking to invest in water stocks, keep reading to learn about seven of the best ones you can buy today.

Top 7 water stocks in 2023

Top 7 water stocks in 2023

1. American Water Works

1. American Water Works

American Water Works may provide one of the best examples of how boring stocks can quietly crush the market. Founded in 1886, the water utility went public at $21.50 a share in 2008 and was hovering around $120 a share in October 2023.

American Water Works is the country's largest water utility stock. Like other utilities, it benefits from being a regulated monopoly, meaning that the company doesn't face competition in the regions where it operates. In exchange, its prices are regulated by state and local governments.

Over the years, American Water Works has grown by investing in its own infrastructure through acquisitions and by seizing opportunities in market-based businesses such as its military services group.

The company plans to continue investing in the business and is forecasting between $22 billion and $25 billion in capital expenditures this decade to drive additional growth. It also completed 26 acquisitions in 2022 on top of 23 in 2021.

American Water Works' earnings multiple expanded considerably over the decade when interest rates were low, as the low-interest rate environment caused investors to rotate from bonds into dividend stocks and lifted stock market multiples more generally. However, over the last year, that multiple has come down as interest rates have risen, even as earnings have continued to grow. As a result, the stock has pulled back in 2023.

It's worth keeping an eye on interest rates, but the company's size gives it an advantage in scalability and in making acquisitions. It pays a quarterly dividend of $2.83, or a 2.4% yield, as of October 2023.

2. York Water Company

2. York Water Company

York Water Company, founded in 1816, is the oldest investor-owned water utility in the U.S. The company sources, purifies, and distributes drinking water within three counties in south-central Pennsylvania. It also owns two wastewater collection systems and five wastewater collection and treatment facilities.

Because it's a water utility, York's growth is determined by the number of customers it has, as well as water and wastewater rates. Because it can't directly control prices, the best way for the company to grow is by increasing its customer base.

York Water has made a number of acquisitions in its territory to boost growth, but it operates in a slow-growing part of the country. The company's total customer count increased slightly from 71,411 at the end of 2019 to 76,731 at the end of 2022.

Its 2022 revenue increased 9% to $60.6 million. The company is also highly profitable, with an operating margin of 41% in 2022.

York Water pays a dividend yield of 2.2%, and its payout ratio is around 60%, meaning that investors can count on a continuing dividend.It's also paid 611 consecutive quarterly dividends, which is believed to be the record for any U.S. company.

3. Essential Utilities

3. Essential Utilities

Essential Utilities, formerly known as Aqua America, is a water and natural gas utility that serves about 5 million people under the Aqua and Peoples brand.

The company started as a utility in southeastern Pennsylvania and has grown into a presence across 10 states. It focuses on regulated water and wastewater, along with other utilities. In 2020, it entered the natural gas business by acquiring Peoples Natural Gas Company, which gave it 750,000 gas utility customers in three states.

About half of Essential Utilities' revenue now comes from water, and the other half from natural gas. The company is focused on growing in areas where it has a critical mass of operations to gain scale and increase efficiency.

Residential water companies have historically increased revenue by about 1% per year -- a reminder that utilities tend to be a slow-growth industry -- but rising rates have helped, and acquisitions, including the natural gas business, drove revenue up 28% in 2021 to $1.88 billion and another 12% in 2022 to $2.29 billion. The company is also highly profitable, with a net profit margin of 20%.

Essential Utilities currently pays a 3.6% dividend yield and has a long history of raising its dividend.

4. American States Water Company

4. American States Water Company

American States Water Company is a diversified utility company with several subsidiaries and three segments, including water, electric, and contracted services.

As of the end of 2022, the company's regulated utilities had 263,265 water customers and 24,656 electric customers. It also has a number of military contracts.

A majority of its revenue comes from Golden State Water Company, a subsidiary involved in the purchasing, production, and distribution of water in 10 California counties.

Like other utilities, American States Water Company benefits from a lack of competition. However, its growth has been modest in recent years, and revenue actually fell 1.5% in 2022 to $491.5 million, due to a delay in raising water rates.

American States Water Company has been less acquisitive than other water utilities, although its profits grew steadily from $1.62 per share in 2016 to $2.11 in 2022. The company has kept costs relatively flat even as rates have ticked up.

American States Water has also been a reliable dividend payer, offering a dividend yield of 2.1% as of April 2023.

5. Middlesex Water Company

5. Middlesex Water Company

Middlesex Water Company was founded in 1897 and operates regulated water and wastewater utility systems in New Jersey and Delaware. It has approximately 117,000 customers across the two states.

Middlesex's revenue has grown slowly over the past six years, increasing from $132.9 million in 2016 to $162.4 million in 2022, or just about 3% annually. In 2021, it sold a Delaware wastewater facility, and in one of its territories, rates actually decreased in response to the Tax Cuts and Jobs Act of 2017 since the company's tax payments significantly fell after that bill was passed. The company has not sought to grow through acquisitions, but operating income jumped in 2022 due to a water rate increase.

Middlesex sees four issues affecting its net income: Weather, rate relief, effective cost management, and customer growth.

The company has been a reliable dividend stock over the years and regularly increases its payout. As of October 2023, Middlesex paid a 1.9% dividend yield. It has a payout ratio of about 60%, meaning that it should be able to easily increase its dividend in the coming years.

6. Xylem

6. Xylem

Xylem isn't a water utility but a water technology company. It makes a wide range of products to handle the transportation and treatment of water, pumping and heating, and measurement for meters and data analytics.

With a unique business model, Xylem has no single competitor, but it competes against a wide array of companies across its three business segments. It estimates its total served market to be $60 billion in the segments it operates -- about 10% of a larger addressable market of $600 billion in the global water industry.

The company sees opportunities in emerging markets as clean water becomes more accessible through technological innovation.

Xylem's revenue rose 7% in 2022, and an easing semiconductor supply helped boost revenue from its measurement and control solutions division in the second half of the year.

In January 2023, the company announced it will acquire Evoqua Water Technologies, which provides water treatment solutions, creating an industry leader with $7 billion in combined revenues.

Historically, Xylem has been solidly profitable, although its profits have fluctuated. Earnings per share (EPS) peaked in 2018 at $3.03 and fell to $1.41 in 2020, hammered by the decline in revenue and higher expenses. EPS bounced back to $2.35 as it regained momentum in the pandemic recovery in 2021, but fell to $1.96 in 2022.

Xylem has regularly raised its dividend since its initial public offering (IPO) in 2011, and it now pays a 1.4% dividend yield.

7. Primo Water Corporation

7. Primo Water Corporation

The Primo Water brand may be best known for its exchangeable water tanks, available at big-box stores, but the current Primo Water is the result of beverage company Cott Corporation acquiring Primo Water in March 2020. Cott sold its coffee and tea business and rebranded as Primo Water to become a pure-play water company.

Management is still in the process of repositioning the business following the acquisition. The company announced in November 2021 that it would exit the North American single-use retail bottled water business, which will help increase profitability and reduce its carbon footprint.

Primo Water grew its revenue by 7% in 2022 to $2.21 billion with 17% growth in its water exchange, offset by its exit from the single-use bottle business in the U.S. and its pullout from Russia. The company also expects to continue to make acquisitions to drive growth.

On an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis, the company's margins are about 20%, and its generally accepted accounting principles (GAAP) profit is closer to breakeven because of its heavy debt burden.

Still, the company is delivering steady growth and offers investors a unique opportunity as a rare pure-play water consumption stock.

Is investing in water stocks right for you?

Water stocks have pulled back in recent months as interest rates have continued to move higher, but most of these stocks have outperformed the over the past decade. During one of the greatest bull market runs in stock market history, that's an impressive feat for a group of dividend-paying, recession-proof stocks in what's seen as the relatively safe and sleepy utilities industry.

With this track record, diversifying your portfolio with some water stocks looks like a smart move, especially given their position as a possible hedge against climate change.