By: Mark Whittaker
Even though water covers most of the earth’s surface, potable water is harder to come by, and it’s becoming more scarce as climate change warms the planet.
We need this liquid gold for drinking, sanitation, and watering crops and livestock, but the infrastructure to make this happen is aging in developed nations. In other places, it’s lacking altogether, and the United Nations says intense water scarcity could displace around 700 million people by 2030.
“Scarcity is a predominant theme in the water space, as demand is expected to exceed supply by (around) 40% by 2030, and in fact, only 1% of water on the globe’s surface is usable for human consumption,” says Jean-Hugues de Lamaze, managing director and senior portfolio manager at Ecofin.
Deiya Pernas, co-founder of Pernas Research, says the convergence of pollution and unpredictable weather patterns driven by global warming make access to clean and usable water more difficult, even as water demand continues to increase from industry, agriculture and a growing population.
Combined with aging infrastructure, there is “immense potential for companies involved in addressing these pressing water-related issues,” Pernas says. “Their solutions have a substantial runway for growth, which can translate into higher returns on capital for investors who choose to allocate their funds to this sector.”
American Water Works Co. Inc. (AWK)
Pernas likes this company, which is the largest listed water and wastewater utility in the U.S., serving about 14 million people. The company has regulated operations in 24 states, and long-term military contracts add stability to its base of residential, public and commercial customers.
“We believe the company will continue to grow its dividend at close to 10% through continual synergistic acquisitions and growth capital expenditures,” Pernas says.
The stock yields 2.2%.
Valmont Industries Inc. (VMI)
Valmont makes irrigation systems for watering crops, and it says it has more than 250,000 of them around the world. The company also uses technology that can help farmers view their system of pumps, pivots and crops to make decisions more efficiently.
“By utilizing advanced technology like precision pivots and drip irrigation, Valmont helps farmers conserve water resources, reduce operational costs and enhance crop yields,” Pernas says. “The agriculture industry is (a) heavy (user) of water, and scarcity challenges will continue to see Valmont’s solutions gain wider adoption.”
Beyond agriculture, the company also makes telecom equipment, energy grid infrastructure and light poles.
VMI has a 1% yield.
Ferguson PLC (FERG)
This multinational distributes products to the water, sanitary sewer and stormwater management industries and counts water sewer authorities, utility contractors, public works contractors and heavy highway contractors as customers.
The company is the largest holding in the Ecofin Global Water ESG Fund (EBLU), an ETF that mandates that included companies get at least half of their sales from water industry-related activities or at least 40% from the water industry itself.
The company is involved in both residential and non-residential markets, which can provide some cushion when one is doing better than the other.
In Ferguson’s fiscal first quarter, U.S. residential sales dropped 7% and civil/infrastructure sales fell 1%, but those declines were somewhat offset by 2% growth in commercial sales and a 3% jump in industrial revenue.
FERG yields 1.7%.
Related: 7 Best Utility Stocks to Buy for Dividends
Xylem Inc. (XYL)
This water technology company clocks in at No. 2 in the Ecofin fund. It has utility, industrial, commercial and residential customers around the world.
Last year, Xylem completed a $7.5 billion acquisition of water treatment company Evoqua, giving Xylem greater scale.
In its latest quarterly report, the company raised its revenue guidance, saying it is expecting full-year 2023 revenue of $7.3 billion, a 32% increase over 2022. Its third-quarter earnings and revenue exceeded its previous guidance, with orders up 43% on a reported basis while backlog grew 5% percent organically to $5.2 billion, including $1.3 billion from Evoqua.
Xylem yields 1.2%.
Ecofin Global Water ESG Fund (EBLU)
Investors who don’t want to pick individual stocks can turn to ETFs, which offer multiple stocks under a single ticker symbol, providing diversification.
This fund is passively managed, and its website says it “is comprised of companies across the globe and throughout the water cycle that we believe are positioned to benefit from the pursuit of solving the water supply/demand imbalance.”
It has an expense ratio of 0.4%, compared to the ETF Database category average of 0.54%. That means you’ll pay $40 in annual fees on an investment of $10,000.
EBLU yields 1.5%.
First Trust Water ETF (FIW)
This well-established water ETF tracks an index of companies that derive a substantial portion of their revenues from the potable water and wastewater industry.
FIW contains a healthy allotment of utilities, which are generally considered defensive plays because of their steadying effect during economic downturns. After all, people are going to drink water and take showers regardless of economic conditions.
And as you might expect from a water ETF, the fund has a large percentage of industrials stocks. These types of companies tend to do better when the economy is performing well, or is expected to.
The fund has a 0.53% expense ratio and yields 0.7%.
Invesco Water Resources ETF (PHO)
This leading water ETF invests in companies that create products that conserve and purify water for homes and businesses.
“Both First Trust Water and Invesco Water Resources are ideal ETFs that provide … exposure to water utilities, wastewater treatments, testing, and even pumps, pipes and valves – the backbone of the non-sexy water infrastructure,” Pernas says. “FIW probably wins out given its slightly lower expense ratio, lower exposure to (American depositary receipts) and more concentration.”
PHO has an expense ratio of 0.6% and yields 0.6%.
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