6 Best Water Stocks for 2012
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Water is the most important natural resource on the planet; without it, life as we know it ceases to exist. Water should also be an asset in most investors’ portfolios, if for no other reason than manufacturers offer a limited source with unlimited demand. These companies tend to be stable, profitable ventures; this is a perfect combination to add to anyone’s holdings. Six of the best water stocks to consider for 2012 are PowerShares Water Resource (NYSEMKT: PHO), Aqua America Inc (NYSE: WTR), American Water Works Co. (NYSE: AWK), Danaher Corp. (NYSE: DHR), Pall Corp. (NYSE: PLL) and Tetra Tech Inc (NASDAQ: TTEK).
PowerShares Water Resource
This small-cap ($808.84 million) exchange traded fund is a solid blend of value and growth. Founded in 2005, the company invests according to the Palisades Water Index. This includes water utilities, treatment, analytical and monitoring businesses, infrastructure and distribution and water resource management. The company is trading at $18.16, near the top of its 52-week range of $14.01 to $20.61.
Currently considered overbought because it is trading above both its 50-day and 200-day moving averages, this ETF still has a P/E of 16 and paid a dividend of $0.018 for a yield or 0.40%. Although water stocks suffered in 2011, this is a good stock to hold (at least in small quantities) as much for its stability as for its growth potential.
Aqua America Inc
Aqua America is a water and wastewater provider who operates in the Midwest and along the East coast. Founded in 1968, the company has a capitalization of $3 billion, is currently trading at $21.69 and offers a dividend of $0.66 for a yield of 3.10%. This healthy dividend is the reason some analysts are recommending WTR as a “buy.”
Even beyond its dividend, Aqua America has a reasonable payout ratio of 62%, suggesting that the company is not overextending itself to pay investors. The return on equity is a steady 12.42%, and the stock appears poised to take a bullish run above both its 50-day and 200-day moving averages. With a one-year target of $24.71 that is about 15% above its current share price, this is another great option.
American Water Works Co.
Providing both fresh and wastewater services to parts of the United States and Canada, American Water Works is another hot prospect for purchase. The company is capitalized at $5.69 billion, and offers a solid, low-risk option that currently has a dividend of $0.92 for a yield of 2.90%. The company's current share price is $32.77, and its one-year target estimate of $35.21 suggests a possible rise of nearly 10% in share price. This compares favorably with its 8.42% gain last year.
American Water Works has chosen to grow the company largely through acquisitions, but its 10.7% year-to-year quarterly earnings growth shows that the company is expanding as well. Although it has a manageable 50% payout ratio, the company is -$610.19 million in levered free cash flow, a signal that investors should watch for indications of stress that could affect earnings. For buyers looking for a holding that will increase in both price and dividend, AWK is still a very good holding.
A profitable and diversified company, Danaher Corp is a manufacturer of professional, medical, industrial and commercial products and services. In addition, the company provides ultra-pure, potable, and waste water services for residential and business applications. DHR is a mixed stock, offering a 17% growth rate in EPS over the past five years while paying a $0.10 dividend for a 0.20% yield.
Currently trading at $51.29, the stock is expected to test the high-end of its $39.34 to $56.09 range with a one-year target estimate of $57.30. Flush with a levered free cash flow of $844.82 million, the company has an incredibly low payout ratio of 3%. Although its year-to-year quarterly earnings growth tumbled by 19%, the company is still a very solid investment going forward.
Operating in the purification and separation sectors of the water industry, Pall Corp. is another strong water stock to consider for 2012. The New York company, found in 1946, has a diversified product line and excellent fundamentals that leave a favorable impression with investors. Trading just above $60 per share, the company has been testing the high end of its $39.81 - $60.72 range, while paying out a dividend of $0.70 for a yield of 1.2%. On Jan. 20, PLL announced a dividend increase of 20%, raising its annual payout to $0.84.
This increase marks the eighth consecutive for Pall. The company holds $227.96 million in levered free cash flow, and it has a return on equity of 22.24%. Held mostly by institutions, (91.90% of its total free shares) the company is likely in a position to see a share price increase, as suggested by its $60.75 one-year target. Pall Corp. offers a stability and reputation for growth that makes it a good stock to acquire.
Tetra Tech Inc.
Tetra Tech is a consulting company that specializes in building the infrastructure necessary for bringing fresh water and sanitation services to a growing number of customers. Intimately involved in a critical service, the company’s role as a consultant allows it to reduce its overhead and generate earnings without the capital expenditures required for building filtration and desalination systems.
Although Tetra Tech does not pay dividends, the company is on solid financial footing. A steady year-to-year quarterly earnings growth of 14.10%, a PEG ratio of 0.83 and $76.74 million of levered free cash flow all help to show this stability. Just over $22 per share, TTEK is considered a buy for many analysts. With its one-year target estimate of $26.42 representing an increase of nearly 20%, investors should also be looking to buy this company.
A Cascade of Value in Water Stocks
With the importance of water for daily life, the companies that provide the service and infrastructure tend to be very good investments. Many of these companies offer a solid blend of price increases and dividends while providing stability to a portfolio. For these reasons, six of the best water stocks to consider in 2012 are PowerShares Water Resource, Aqua America Inc., American Water Works Co., Danaher Corp., Pall Corp. and Tetra Tech Inc.
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