We recently compiled a list of the 8 Best Water Stocks To Invest In. In this article, we will look at where American States Water Company (NYSE:AWR) ranks among the best water stocks to invest in.
The water industry is grappling with a unique set of challenges and opportunities as the demand for clean and safe drinking water continues to rise globally. According to the American Water Works Association’s (AWWA) State of the Water Industry Report, there is increasing scrutiny on water quality and access standards, while the sector simultaneously faces pressures from aging infrastructure, water scarcity, emerging contaminants, and evolving cybersecurity threats. The convergence of these issues has made it essential for industry professionals to adopt innovative solutions, foster collaboration, and make strategic investments in people and technology.
This dynamic landscape presents both risks and opportunities for investors looking to enter the water sector. Companies operating in this space are not only focused on ensuring reliable access to drinking water but also on pioneering technologies that address complex issues such as water purification, distribution, and resource management. The report notes that watershed and source water protection, once considered secondary concerns, have now emerged as the top priority for water utilities. This shift reflects a growing recognition of the importance of safeguarding water sources to maintain a sustainable and affordable supply.
In 2024, watershed protection surpassed the perennial challenge of aging infrastructure, which has long been a concern for water utilities. Contributing to this shift are various factors, including the prolonged impacts of climate change, drought conditions, and the threat of contaminants such as per- and polyfluoroalkyl substances (PFAS). PFAS have become a major water quality concern due to their presence in numerous industrial products and their potential to harm public health. Addressing this issue alone is expected to cost the industry nearly $40 billion in capital improvement investments. This underlines the financial and operational hurdles that water companies must overcome, making it a pivotal year for those at the forefront of water resource management.
Despite these challenges, the industry is taking proactive steps to enhance water quality and infrastructure resilience. The Bipartisan Infrastructure Law (BIL) has provided some relief, offering funding to support capital projects, which in turn helps address concerns about aging systems. Utilities are also increasingly implementing water protection plans, with over 61% of respondents in the AWWA survey indicating that they have already integrated or are in the process of integrating source water protection initiatives. This proactive stance demonstrates the sector’s commitment to long-term sustainability.
One of the more critical developments in the water industry is the integration of new technologies. Investments in digital solutions, advanced treatment methods, and green alternatives are expected to more than double over the next one to three years. The adoption of such technologies is seen as “very important” by utility operators and “extremely important” by service providers, according to the AWWA report. The focus is on maximizing the lifespan and performance of existing systems while simultaneously exploring eco-friendly innovations that can bolster water system resilience. This creates a fertile ground for companies specializing in technological advancements to thrive, as they cater to the industry’s growing demand for efficient and sustainable solutions.
Another pressing issue for water industry is cybersecurity. As utilities increasingly rely on digital infrastructure, they become more vulnerable to cyber threats, which pose significant risks to water operations and the privacy of customer data. The survey found that 67% of participants view cybersecurity as a “very” to “critically” important issue, and 82% believe that cyber threats would have a “slight” to “significantly negative” impact on the water sector. Despite these concerns, smaller utilities often lack the resources to enhance their cybersecurity posture, creating a security gap that could lead to severe disruptions. Addressing these vulnerabilities is crucial as utilities look to secure their operations against growing cyber threats.
Looking ahead, water utilities must continue to adapt and innovate to meet the evolving challenges of the industry. Climate change and its associated extreme weather events, for instance, pose a growing threat to water resources and infrastructure. Droughts, water shortages, and unpredictable weather patterns have made it imperative for utilities to adopt robust water management strategies. Consequently, companies that provide solutions for water conservation, infrastructure renewal, and climate resilience are well-positioned to capitalize on these emerging trends.
The water industry’s focus on source water protection, technological innovation, and infrastructure resilience, coupled with its commitment to addressing cybersecurity and climate change, makes it a compelling sector for investors. Companies that are leading in these areas have the potential to drive significant returns while also contributing to the sustainability and safety of global water resources. In the following sections, we explore some of the best water stocks to invest in, analyzing their strategies, performance, and potential for growth in this complex and ever-evolving industry.
Our Methodology
For this article, we sifted through ETFs and online rankings to identify 15 possible companies that operate in the water industry. We then chose the 8 stocks that were the most widely held by hedge funds, as of Q2 2024. The list is arranged in ascending order of the number of hedge fund holders in each firm.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
American States Water Company (NYSE:AWR) is a notable player in the water sector, primarily due to its significant operations in providing water utility services through its subsidiary, Golden State Water. This focus on water services, combined with consistent performance metrics, positions it as one of the best water stocks to consider for investment.
As of the second quarter of 2024, American States Water Company (NYSE:AWR) reported a decline in consolidated earnings, with earnings per share (EPS) recorded at $0.85, compared to $1.04 for the same quarter last year. However, the adjusted earnings remained steady, reflecting resilience amid challenging conditions. This quarter’s performance was influenced by elevated operating expenses and increased interest costs, as well as favorable regulatory adjustments last year that are not expected to recur. Despite these challenges, revenue from the regulated water segment showed an increase due to recent rate hikes, indicating a positive trajectory for future earnings.
The company’s commitment to infrastructure investment is a crucial factor in its bullish outlook. With an authorized capital investment of approximately $573.1 million over the next three years, American States Water Company (NYSE:AWR) is well-positioned to enhance its service delivery capabilities. This investment not only ensures compliance with regulatory standards but also contributes to the reliability and safety of its water supply.
Additionally, the company recently approved a significant dividend increase, boosting its quarterly cash dividend to $0.46551 per share, reflecting an annualized rate of $1.86. This represents an 8.3% increase from the prior year, emphasizing the company’s ability to generate sustainable earnings growth. The consistent payment and increase of dividends over 70 consecutive years showcase its commitment to returning value to shareholders.
Furthermore, the number of hedge fund holders in American States Water Company (NYSE:AWR) has risen to 20 as of Q2 2024, compared to 19 in the previous quarter. This increase in institutional interest underscores growing confidence among investors.
In conclusion, American States Water Company (NYSE:AWR) presents a compelling investment opportunity, characterized by a strong commitment to infrastructure development, reliable revenue growth from regulatory adjustments, and a history of consistent dividend increases. The fundamentals support a bullish thesis for this water stock, making it a worthy consideration for investors looking to capitalize on the growing demand for water utilities.
Overall AWR ranks 6th on our list of the best water stocks to invest in. While we acknowledge the potential of AWR to grow, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AWR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
