The 8 Best Water Stocks: How To Profit From One Of Life’s Bare Necessities

Next on the list is A.O. Smith, which like Pentair is a member of the Dividend Aristocrats list. A.O. Smith is a leading manufacturer of residential and commercial water heaters, boilers and water treatment products. As a result, A.O. Smith is directly involved in the water business and is a beneficiary of higher demand for water down the road.

A.O. Smith generates 64% of its sales in North America, 34% in China and the remaining 2% in the rest of the world. The company has a particularly impressive growth outlook, as it conducts a large portion of its business in emerging markets like China and India. These countries have very large populations and high rates of economic growth, and where demand for water will be particularly strong in the coming years.

The company has gained market share in water heaters for 15 consecutive years. It has generated highly impressive EPS growth of 25% per year over the past several years.

AOS Earnings


Source: Investor Presentation

A.O. Smith reported its second-quarter earnings results on July 30th. It was a difficult quarter overall, as A.O. Smith reported an 8% decline in both revenue and earnings-per-share. The company is facing pressure from the global trade conflict over the past several months. As China represents a large portion of its business, a protracted trade dispute could continue to weigh on the company’s financial results.

That said, trade issues are typically a short-term challenge. The long-term outlook remains supportive of growth for A.O. Smith. And, it still expects 2019 to be another highly profitable year. A.O. Smith guides for EPS in a range of $2.35 to $2.41 for the current fiscal year.

A.O. Smith has grown its earnings-per-share by 18% annually over the last decade, which is a very attractive growth rate. The company’s profits grew relatively consistently during that time frame. Earnings-per-share declined from 2009 to 2010 but rose during all other years. The last financial crisis did not have an overly large impact on A.O. Smith’s profits, as earnings-per-share rose between 2008 and 2009.

Importantly, A.O. Smith raised its dividend during every year of the financial crisis. We assess the sustainability of A.O. Smith’s dividend in further detail in the video below:

 The future outlook is highly positive for A.O. Smith. Thanks to the booming housing market in the U.S. and stronger consumer spending, the company has enjoyed consistent growth in the domestic market. The company is poised to keep growing for years in China thanks to the country’s huge population, its robust GDP growth, and its booming middle class. Over the long-term, we believe that A.O. Smith can grow EPS by 9% per year over the next five years.

A.O. Smith stock trades for a 2019 P/E ratio of 19.0x, based on the midpoint of its revised full-year guidance. This is slightly below our fair value estimate of 20.0x. An expanding P/E ratio could boost annual returns by 1% per year over the next five years.

In addition, EPS growth of 9% and the current dividend yield of 2% lead to total expected returns of 12% per year over the next five years. This is a very attractive rate of return, making A.O. Smith a buy for dividend growth investors.

Water Stock #1: Consolidated Water Company (CWCO)

  • Expected Return: 15.5%

The top-ranked water stock is Consolidated Water Company, which was founded in 1973 as a private water utility in Grand Cayman. Since its founding, it has discovered a very nice niche for itself in the water business. The company uses a desalination process that helps provide water where naturally potable water is scarce or does not exist.

Consolidated Water has since grown to more than $65 million in annual revenue and a ~$210 million market capitalization. It serves a wide variety of customers in six different countries with 14 plants across its service area.

Consolidated Water reported strong first-quarter results on 5/13/19, including 17% revenue growth and 13% gross profit growth for the period. Earnings-per-share increased to $0.41 per share, nearly tripling from the same quarter last year.

Future growth is highly likely for Consolidated Water. The company won a seven-year bulk water supply agreement from the Water-Authority Cayman, beginning July 1st. Additionally, the company completed the expansion of the water production and storage capacity of the Abel Castillo Water Works plant in Grand Cayman.

Furthermore, the development of the Rosarito, Baja California, Mexico projects involving the construction and operation of a major seawater desalination plant and distribution pipeline continued to make solid progress.

As the largest potable water producing plant in the Western Hemisphere and a major, much-needed new source of drinking water for the coastal region of Baja California for at least the next 37 years, the project will have a sizable moat around it and provide considerable growth for the company. In all, we expect annual EPS growth of 7% per year over the next five years.

Consolidated Water shares trade for a 2019 P/E ratio of 16.4x, below our fair value estimate of 22.0x. An expanding P/E ratio could boost annual returns by 6.1% per year over the next five years. Including EPS growth and the 2.4% dividend yield, total returns are expected to reach 15.5% per year. This makes Consolidated Water the top stock for investors interested in gaining exposure to water.

Final Thoughts

Water could be one of the biggest investing themes over the next several decades. An increasing global population is only going to cause demand for water to rise in the future. And, given the fact that water is a necessity of human life, demand for water should hold up extremely well even during the worst recessions.

These factors make water stocks appealing for risk-averse investors looking for stability from their stock investments. Not all the stocks on this list receive buy recommendations at this time, as some appear to be overvalued today. But all the stocks on this list pay dividends and are likely to increase their dividends for many years in the future.

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Disclaimer: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities. However, the publishers of Sure ...

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