The 7 Best Water Utilities Stocks to Buy for Portfolio Diversification

With recent headwinds in the banking sector spilling over to other segments of the economy, investors might want to seek opportunities with the best water utility stocks to buy. No, utility companies are not exciting investment sectors, but that’s also the point. In some ways, their boring nature centers around their generally predictable activities. Moreover, utilities hold natural monopolies due to extreme barriers to entry.

Crucially, the best water utility stocks to buy also have a distinct advantage: the underlying resource is the most valuable on the planet. While most of the Earth is covered in water, only a small part of it is drinkable. Moreover, as geopolitical tensions almost invariably increase, competition will arise to secure needed supplies. Therefore, it makes sense to consider these critical companies.

California Water Department (CWT)

Based in San Jose, California, California Water Service (NYSE:CWT) provides drinking water and sanitation services. According to its public profile, it is the third largest investor-owned water utility in the United States. California Water serves two million people through subsidiaries in Hawaii, New Mexico, Washington and its home state. Currently, CWT is trading at a relative discount, losing nearly 7% since the January open.

As a utility company, it is unpredictable that it offers exceptional financial data. That said, operationally, California Water’s three-year free cash flow (FCF) growth rate is 10.8%, beating the industry’s 61.29%. In addition, its book growth rate over the same period is 14.4%, higher than the industry’s 82.52%. Currently, the company is posting a forward yield of 1.81%. Notably, CWT commands 56 consecutive years of annual dividend increases.

Finally, Wall Street analysts rate CWT as a consensus Moderate Buy. Their average price target reached $60.50, implying more than 5% upside potential. With a well-balanced profile, CWT ranks among the best water utility stocks to buy.

SJW Group (SJW)

Source: kak/ShutterStock.com

Also based in San José, SJW Group (NYSE:SJW) is a water utility treatment, distribution, wholesale and retail company. According to its business profile, SJW serves 228,000 connections that reach over one million people in California regions. It also provides services to 60,000 people in Texas. So far this year, SJW has fallen almost 7%. However, over the past year, SJW has gained about 14% of his net worth.

Financially, SJW makes a decent case for the best water utility stocks to buy. Operationally, the company’s three-year revenue growth rate was 11.5%, exceeding 69% for the industry. Moreover, its EBITDA growth rate over the same period is 20.5%, surpassing 82.2% of its rivals. In terms of profitability, the company’s net margin is 11.83%, ahead of 64% of players in the sector. Currently, SJW has a forward yield of 1.98%. Additionally, it features 56 consecutive years of dividend increases. Finally, hedging analysts view SJW as consensus. However, their average price target is $84.50, implying more than 10% upside potential.

Veolia Environment (VEOEF)

Source: Shutterstock

A French transnational company, Veolia Environment (OTCMKTS:VEOEF) is a utility company covering three main service areas: water management, waste management and energy services. Interestingly, Veolia also specializes in desalination, or the process of converting seawater into potable (potable) water. Since the beginning of the year, VEOEF has gained more than 8% of its equity value. However, it is undervalued last year, down 13% below par.

Despite the red ink, adventurous investors of the best water utility stocks to buy should take a look at Veolia. In terms of its financials, the company boasts a three-year book growth rate of 17.9%, higher than 70% of its peers. Moreover, in the last 10-year period, it has recorded profits in nine of them. Perhaps most attractive to potential buyers, the VEOEF market price at a forward multiple of 15.49. In profit reduction, Veolia ranks better than 60.87% of the competition. Currently, hedge analysts rate VEOEF as a consensus Moderate Buy. Their average price target stands at $31.99, implying nearly 12% upside potential.

American Water Works (AWK)

Source: Shutterstock

A public utility company, American hydraulic works (NYSE:AWK) through its subsidiaries provides water and wastewater services in the United States According to its company profile, American Water serves approximately 1,700 communities in 14 states. This equates to approximately 14 million people through 3.4 million customer connections. Despite its relevance, since the start of the year, AWK has fallen more than 7% in net worth.

Still, it’s worth taking a look at one of the underrated examples of the best water utility stocks to buy. Operationally, the company has a three-year book growth rate of 7.7%, outpacing 65% of its peers. In terms of revenue, the utility achieves a net margin of 21.62%. This statistic exceeds 87.82% of industry peers. Plus, it boasts 10 years of profitability over the past decade. For passive income, American Water offers a forward yield of 1.84%. In particular, it presents 13 consecutive years of dividend increases. When it comes to Wall Street, analysts consider AWK a consensus. However, their average price target stands at $163, implying more than 14% upside potential.

Middlesex Water (MSEX)

Source: Shutterstock

Based in New Jersey, Middlesex Water (NASDAQ:MSEX) is a water utility with a long history, which was first incorporated in 1897. Currently, it is one of the mid-tier companies among the best water utility stocks to buy, with a market capitalization of of $1.34 billion. Since the January open, the MSEX has fallen 4%. Over the past year, stocks have fallen 25%, reflecting a higher risk profile.

Nevertheless, MSEX may offer higher reward potential in exchange for this risk. Plus, its finances aren’t that bad, at least compared to other utility companies. For example, Middlesex’s three-year EBITDA growth rate is 12.4%, higher than competitors’ 69.79%. Also, its FCF growth rate over the same period is 18.7%, higher than nearly 71% of industry players. In addition, the company enjoys strong profitability with a net margin of 26.12%. Unfortunately, its forward yield doesn’t quite reflect that at 1.63%. Yet it features 27 consecutive years of dividend increases. Finally, Robert W. Baird’s Ben Kallo views MSEX as a buy. Experts predict the shares will hit $88, implying upside potential of almost 15%.

Xylem (XYL)

Source: DenisProduction.com / Shutterstock.com

Based in Washington, DC, Xylem (NYSE:XYL) is a water technology provider. It serves the utility, residential, commercial, agricultural and industrial sectors. Additionally, Xylem does business in more than 150 countries. Since the start of the new year, XYL has lost more than 12% in market value. However, in the past 365 days, it has gained more than 10%. In the future, it may possibly rise higher.

According to Gurufocus.com’s proprietary calculations for fair market value (FMV), XYL is slightly undervalued. In large part, the company’s greatest strengths arguably center around its profitability metrics. For example, its operating margin is 11.79% the previous year, higher than the competition’s 73.56%. Additionally, its return on equity is 10.88%, outperforming its peers at 64.31%. Currently, Xylem has a forward yield of 1.36%. While not the most generous passive income rate, its payout ratio sits at 36.72%.

Finally, hedging analysts rate XYL as a consensus Moderate Buy. Moreover, their average price target stands at $118.43, implying nearly 22% upside potential. Therefore, for sheer capital return potential, it is one of the best water utility stocks to buy.

Essential Utilities (WTRG)

Source: Klintsou Ihar / Shutterstock.com

A utility company with holdings in several states, primarily in the Midwest and South, Essential utilities (NYSE:WTRG) provides drinking water and sanitation infrastructure and services. Although one of the most popular ideas among the best water utility stocks to buy, Essential also represents a volatile trade. Since the January open, the WTRG has fallen almost 11%. And last year it was down almost 10%.

Still, for the adventurous type, WTRG might be intriguing. According to Gurufocus.com FMV calculations, WTRG rates are slightly undervalued. Objectively, the company enjoys strong growth and profitability. Its three-year revenue growth rate is 28.3%, outpacing nearly 94% of the competition. For net margin, its 20.33% metric beats nearly 86% of industry peers. Clearly, Essential provides relatively strong passive income with a forward yield of 2.66%. Additionally, he commands 31 consecutive years of dividend increases. Looking to the street, covering analysts view WTRG as a unanimous strong buy. Their average price target is $54, implying more than 25% upside potential.

As of the date of publication, Josh Enomoto had no position (directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.