Bob Ciura: 3 Water Utility Stocks for Safe and Reliable Income

Of all the places to invest, there may not be a more recession-proof sector than water stocks. People always need clean water, regardless of the state of the economy. In turn, many top water stocks have regular customer bases and very consistent revenues and earnings.

This great stability paves the way for water stocks to pay growing dividends to shareholders. In fact, many water stocks have extremely long histories of increasing dividends. Some have even reached Dividend Aristocrat status, which means they have raised dividends for at least 25 consecutive years.

This article will discuss 3 companies that conduct at least a significant portion of their business in water. Furthermore, all 3 water stocks pay dividends to shareholders and have grown their dividends for many years.

Water Stock: A.O. Smith (AOS)

A.O. Smith is a leading manufacturer of residential and commercial water heaters, boilers and water treatment products. A.O. Smith generates the majority of its sales in North America, with the remainder from the rest of the world. It has category-leading brands across its various geographic markets. The company is on the Dividend Aristocrats list.

In the third quarter, revenues of $870 million during the quarter, which represents a decline of 4% compared to the prior year’s quarter. Revenues were flat in North America and declined by 13% in the rest of the world, due to currency rate movements and COVID-related shutdowns in China as well.

A.O. Smith generated earnings-per-share of $0.69 during the third quarter, which was down 15% on a year over year basis. This can mostly be explained by the combination of lower revenues and some margin headwinds from inflation and negative operating leverage. A.O. Smith has reaffirmed its guidance for 2022.

The company is forecasting earnings-per-share in a range of $3.05 and $3.15. At the midpoint of the guidance range, A.O. Smith’s earnings-per-share would grow by 3% for 2022. This should easily allow for continued dividend hikes.

Water Stock: Pentair plc (PNR)

Pentair operates as a pure–play water solutions company with 3 segments: Aquatic Systems, Filtration Solutions, and Flow Technologies. Pentair was founded in 1966 and has increased its dividend for more than four decades in a row, when adjusted for spin–offs.

Pentair reported its third quarter earnings results on October 25. Revenues of $1.06 billion grew 9% year-over-year, and beat estimates slightly. Core sales, which excludes the impact of currency rate movements, acquisitions, and divestments, grew 4% year over year.

Pentair recorded earnings-per-share of $0.99 for the third quarter, up by 11% year over year. Pentair’s earnings-per-share beat the analyst consensus by $0.06. Pentair updated its guidance for the current year during the earnings report. For fiscal 2022, Pentair is now forecasting earnings-per-share of around $3.65, which indicates solid earnings-per-share growth of around 10%.

Pentair is also a Dividend Aristocrat, having increased its dividend for 45 consecutive years. Shares currently yield 2%.

Water Stock: American States Water (AWK)

American States Water is a utility company with two business units: Utilities (primarily water, some electricity) and Services (wastewater services on several US military bases). American States Water is based in California, where it operates its utilities business. The company’s services unit spans several US states. American States Water is a Dividend King, which means it has 50+ years of rising dividends.

American States Water reported its third quarter earnings results on November 7th, 2022, which included a $0.07 per share decrease in recorded third quarter consolidated diluted EPS compared to third quarter of 2021, or $0.06 per share increase in terms of adjusted consolidated diluted EPS. Third quarter results reflect an unfavorable variance of $0.03 per share from losses on investments held to fund a retirement plan.

American States Water paid out roughly half of its net profits a year during the last decade. This is not a high payout ratio, especially for a stable company such as American States Water that generated strong earnings during the last financial crisis. We believe that the recession resilience, the moderate payout ratio, and the strong dividend growth track record mean that American States Water’s dividend is very safe.

Utilities are not cyclical, and due to the decades-long contract durations with the US military, the services business is not cyclical either. American States Water is therefore quite recession-proof. There is a low risk of an earnings decline, shown by the fact that even during the last financial crisis, profits kept increasing.
_______________
Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.