At the end of The Big Short, after the heroes who shorted mortgages made out like bandits, we saw little snippets of what each investor was doing after their success. The most exciting revelation was Michael Burry, who had moved all his investments into one place.
I can't explain why Burry chose the sector better than he can, but there are some apparent reasons investors should like it. Water is essential to all aspects of life. Without it, life on this planet would cease to exist. Not only do we consume it, but water is integral for things like bathing, farming, transportation, generating power, manufacturing, and recreation. And that's just scratching the surface, too.
It's no coincidence Canada's major cities were built around bodies of water. Our ancestors recognized the importance of having a steady source of water around. Canadians are fortunate to live in a nation with plenty of wetlands, too. We're not in danger of running out of water anytime soon.
But that doesn't mean Canada will always be safe. Climate change may alter the world in unthinkable ways. We currently enjoy peaceful relations with our neighbours to the south; perhaps the relationship becomes more strained as dry regions of the United States turn even drier. People can do drastic things when their way of life is threatened.
It's tricky for Canadian investors to add pure-play Canadian stocks when it comes to water. Still, a few companies offer a more indirect way to invest in this commodity. Let's take a closer look at some of the best water stocks.
What are the top Canadian water stocks to buy right now?
- Algonquin Power & Utilities (TSE:AQN)
- H2O Innovation (TSE:HEO)
- Global Water Resources (TSE:GWR)
- Primo Water (TSE:PRMW)
- American Water Works Company (NYSE:AWK)
Algonquin Power & Utilities (TSE:AQN)
Let's start with a way Canadian investors can access water utilities across the United States, with a bunch of power and natural gas infrastructure thrown in.
Algonquin Power & Utilities (TSX:AQN)(NYSE:AQN) has spent much of the last twenty years acquiring utility assets across Canada, the United States, Chile, and the Bahamas. It boasts more than 1.2 million customers.
Let's focus on the water business, which accounts for approximately 15% of Algonquin's earnings.
Assets include water and wastewater systems across nine states, with over 500,000 customer connections and about 5,500 miles of water distribution assets. Besides these obvious water assets, Algonquin owns hydroelectric power plants through its renewable power division.
A water utility is an excellent way to play a long-term investment in water. I suspect most households operate precisely like mine. The water bill comes in, gets paid, and is never thought of again. Now and again, I notice it's higher than before, but what choice do I have? I can't simply switch to another water company.
Finally, Algonquin shares are cheap, falling some 50% compared to all-time highs. Even after a dividend cut, these shares still yield at times more than 6%.
H2O Innovation (TSE:HEO)
H2O Innovation (TSX:HEO) provides water treatment solutions for cities, power plants, and natural resource companies. It uses membrane filtration technology to help these organizations supply fresh, clean water while maintaining maximum flexibility and cost control.
This fresh approach to water treatment has been a fast-growing business. This small market cap company has increased revenues by some 300% since 2016, buoyed by winning various municipal contracts, making inroads in the industrial space,
and acquiring competitors with exciting technology. There aren't many other water stocks that can offer that kind of growth potential.
As climate change impacts these essential utilities, H2O Innovation's products and technologies become more and more valuable. Whether it's for industrial users trying to save water that's becoming more expensive or municipalities who have to start tapping alternative sources so taxpayers can still water their lawns, I can see the company posting excellent growth rates for a long time.
Profitability is struggling for this growth stock, however. The company struggles with low gross margins, which translates into net earnings of only 2 or 3 cents per dollar sold. This should improve over time as the top line increases. If not, shares could languish as investors look for profits, not just revenue growth.
Global Water Resources (TSE:GWR)
Global Water Resources (TSX:GWR)(NASDAQ:GWRS) is an owner, operator, and manager of regulated water, wastewater, and recycled water utilities in the Phoenix and Tucson areas. Water management and conservation are essential in dry regions like the Arizona desert.
The company has delivered tremendous growth as it consolidates other water utilities in a highly fragmented state.
Over the last five years, it has acquired 11 different water utilities, with the potential to add dozens more in Arizona alone -- never mind the rest of the United States. Additionally, the company projects net migration to Arizona over time, with new construction adding to its base.
One issue impacting Arizona's water supply is Lake Mead, the man-made body of water created by the Hoover Dam. Lake Mead's water supply is down 70% from its peak, which has created a shortage for certain parts of Arizona. Global Water's primary supply comes from underground aquifers, meaning it is well prepared to grow despite this obvious challenge.
The company pays a good portion of its profits back to shareholders via dividends. The current payout is $0.30 per share, which translates into a yield that typically hovers around 2%. Investors shouldn't expect much dividend growth over the next little while since the company is looking to expand. Still, it's nice to get paid while you wait.
Primo Water (TSE:PRMW)
Primo Water Corporation (TSX:PRMW)(NYSE:PRMW) is a pure-play water provider after Cott acquired the legacy Primo water business. Primo's primary business is recurring revenue water distribution, delivering three and five-gallon bottles to residential and commercial customers. It also sells water coolers and bottles of certain premium water brands.
You might remember Cott back when it was the dominant private-label soda manufacturer in North America.
This new path by management has excellent potential compared to the legacy business. Soda is a shrinking category, and it's much easier for consumers to justify paying for Coca-Cola or Pepsi if a can is an occasional treat rather than an everyday staple.
Bottled water has been a growing business for years, with the trend poised to continue. Primo projects the U.S. bottled water industry will increase by 6% per year through 2025, with certain other countries delivering even more robust growth. Primo currently operates in 21 different markets across the world.
According to industry estimates, the United States alone consumes approximately 50 billion single-use water bottles annually. That's a lot of plastic. Primo's version of transporting water in bulk is significantly better for the environment. It should help contribute to growth as consumers switch their behaviour.
Another avenue that can contribute to Primo's growth initiatives is how fragmented the water distribution business is. The company has made more than 125 acquisitions since 2014, buying smaller distributors and folding their customers into existing operations.
American Water Works Company (NYSE:AWK)
American Water Works (NYSE:AWK) is an easy choice for investors looking to add water exposure to their portfolios. This water utility provides water services to 1,700 different communities, with assets including 480 treatment plants, 160 wastewater plants, 52,500 miles of pipes, and 76 separate dams.
The company has been around for a long time, tracing its roots back to 1886. It was listed on the NYSE in 1947 before being acquired in 2003.
It was then listed again on the NYSE in 2008. That longevity is a good thing to have on your side.
Arizona isn't the only state with a fragmented water utility system; many other states offer the same opportunity for consolidation. American Water Works has acquired over a thousand of these assets, including some 45 deals in 2022 alone. This translates into expected growth of 1.3 million customer connections for 2023, plus any additional acquisitions. It also grows as these underlying communities construct new property.
The company's predictable revenue and steady acquisitions are perfect for dividend growth over time. American Water Works has increased its dividend each year since relisting in 2008. The current payout is $0.655 per share each quarter, which translates into a 1.9% dividend yield.