With 2020 soon to be history, we're going to look at the year's best-performing stocks in the water utility industry.
Though the overall space underperformed the broader market this year, there was at least one outperformer. Moreover, the industry includes several stocks that have been long-term outperformers.
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Water utility stocks' 2020 performance
Here's how the 10 largest water utility stocks with market caps greater than $300 million (meaning they're at least small-cap stocks) stacked up by performance in 2020, as of Dec. 22.
Company | Market Cap | Dividend Yield | Wall Street's Projected 5-Year Annualized EPS Growth | 2020 Return (Through Dec. 22) | 10-Year Return |
|---|---|---|---|---|---|
| American Water Works (NYSE:AWK) | $26.8 billion | 1.5% | 8.4% | 22.4% | 640% |
| Global Water Resources (NASDAQ:GWRS) | $327 million | 2% | 15%* | 12.8% | N/A** |
| Middlesex Water (NASDAQ:MSEX) | $1.2 billion | 1.6% | 2.7%* | 12.7% | 400% |
| Artesian Resources | $345 billion | 2.8% | 4%* | 2.1% | 171% |
| California Water Service | $2.6 billion | 1.6% | 10.8% | 3.3% | 265% |
| York Water (NASDAQ:YORW) | $604 million | 1.6% | 4.9%* | 1.6% | 242% |
| Essential Utilities (NYSE:WTRG) | $11.1 billion | 2.2% | 6.7% | (1.5%) | 225% |
| SJW Group | $1.9 billion | 1.9% | 13.7% | (4.5%) | 216% |
| American States Water | $2.8 billion | 1.7% | 4.9% | (9.6%) | 469% |
| Companhia de Saneamento Basico do Estado de Sao Paulo (Sabesp) | $5.8 billion | 3% | 10.7% | (42%) | 30.6% |
| S&P 500 | -- | 1.6% | -- | 16.2% | 260% |
DATA SOURCES: YCHARTS AND YAHOO! FINANCE. EPS = EARNINGS PER SHARE. *EARNINGS ESTIMATES PROVIDED BY ONLY ONE OR TWO ANALYSTS. **HELD ITS INITIAL PUBLIC OFFERING IN MAY 2016. RETURNS THAT HAVE BEATEN THE S&P 500 ARE BOLDFACED. DATA AS OF DEC. 22, 2020.
Two notes before we move on to our top three 2020 performers: First, Essential Utilities is the new name of the former Aqua America, which became effective in February following the close of the company's acquisition of Peoples, a natural gas utility serving western Pennsylvania. It's obviously no longer a pure-play water utility. Second, Sabesp is the only non-U.S. based company. It's a Brazilian water utility, and its stock has been volatile over the long term due to political and currency risks and frequent droughts.
1. American Water Works
American Water is based in New Jersey and counts that state and neighboring Pennsylvania as its two biggest regulated water and wastewater utility markets. However, the industry's biggest player also has regulated operations in 14 more states, making it the most geographically diverse company in the industry. (That number will decrease by one once American Water closes on its sale of its New York state business.)
Indeed, its industry-leading size and geographic footprint are key competitive advantages. The combination of these attributes gives it an edge in acquisitions.
American Water also has market-based businesses, including military services and homeowner services operations. The former builds, operates, and maintains water systems for U.S. military bases, while the latter provides warranties for various utility-related systems and components in homes.
The company has raised its dividend every year since it went public in 2008.
2. Global Water Resources
Global Water Resources operates as a regulated water, wastewater, and recycled water utility primarily in metropolitan Phoenix.
For those who are not familiar with recycled water, which seems uncommon outside the hot and dry southwestern United States: It's produced by treating and purifying wastewater and is distributed to the communities the company serves in a system of pipes separate from the ones that supply potable water. It's used outdoors for purposes such as irrigation. This type of setup conserves potable water for drinking and other uses inside homes and businesses.
The company has significant growth potential. The Phoenix Metropolitan Area has been one of fastest growing metro areas in the country for some time. During the 2010s, its population increased by about 18%, according to the U.S. Census Bureau.
Global Water Resources has increased its dividend every year since it went public in 2016. Uniquely for this space, it pays its dividend on a monthly basis, rather than the more typical quarterly schedule.
3. Middlesex Water
Middlesex Water owns and operates regulated water utility and wastewater systems in New Jersey, Delaware, and Pennsylvania. It also operates water and wastewater systems under contract for municipal and private clients in New Jersey and Delaware.
In the third quarter of 2020, Middlesex Water's regulated and non-regulated businesses contributed about 91% and 9%, respectively, of its revenue.
The company has raised its dividend for 48 consecutive years.
Are any of these stocks a buy for 2021?
American Water Works is the best bet for most investors. Its status as the industry's largest and most geographically diverse company provides it with a competitive advantage in acquisitions that should prove sustainable. This is no small thing. The U.S. water utility industry is fragmented, with many municipalities owning their own systems. The pace of consolidation should accelerate due to the COVID-19 pandemic, which is leaving many states and municipalities cash-strapped.
That said, there are features to like about some of the other companies. Middlesex Water and York Water, for instance, might appeal to investors who are particularly conservative. Their debt-to-equity ratios have historically been among the lowest in the group and that's true currently. Moreover, their dividend payout ratios (dividends paid/net income) have also been relatively low.
How about Global Water Resources? It seems worth watching, but with a high debt-to-equity ratio of 3.4 and less than a 5-year track record as a publicly traded company, its stock isn't the best fit for conservative investors.
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