The Wall Street Journal - 09.03.2020

THE WALL STREET JOURNAL. Monday, March 9, 2020 |R5

JOURNAL REPORT |INVESTING IN FUNDS & ETFS

W

aterishot.

Publicly traded

water utilities—

usually one of the

more stolid cor-

ners of the already-conservative util-

ities sector—have been on a tear for

more than a year. Institutions are in-

creasingly on the hunt for invest-

ments that meet new environmental,

social and governance, or ESG,

benchmarks. Meanwhile, individual

investors, particularly retirees, are

joining in on the rush as they look

for safety and dividends.

In the 12 months ended Feb. 27, the

water-utilities sector increased 23.9%,

versus 10.5% for the Dow Jones Util-

ity Average and 4.7% for the S&P 500.

The stock prices of the three largest

companies in the sector— Essential

Utilities (formerly Aqua America),

American States Water and Ameri-

can Water Works —rose 30.9%, 18.3%

and 28.4%, respectively.

Looking for do-good stocks

One big aspect of water companies’

appeal is a strong ESG profile. Water

firms operate under environmental

and governance mandates, and they

provide an essential social service—

which makes them look attractive in

the current climate.

Investors searching for stocks that

hit those standards don’t “have much

they can look at in the [utilities] sec-

tor,” says Angie Storozynski, a for-

mer managing director at Macquarie

Capital in New York. “Funds with

strict ESG mandates cannot invest in

most electric utilities because of

their nukes and coal plants.”

What’s more, water utilities’ fun-

damentals are much more appealing,

Ms. Storozynski says. “To me, a water

utility is the best kind of a utility,

way better than electric or gas. Water

utilities have a much longer invest-

ment horizon, lower operating risk,

face lower customer-affordability

pressures. They don’t face technology

risks.”

There are also many fewer water

companies on the stock market than

other utilities, which means inves-

tors will crowd into a few names,

driving their prices up. The whole

sector consists of just nine publicly

traded firms, and “there are only

two publicly traded water utilities in

the U.S. with a market cap above $10

billion,” Ms. Storozynski says.

Reliable dividends

Dividends are another key part of

water's appeal—even though on the

surface their numbers don’t seem to

be as attractive as their peers’.

Companies in the water sector

have been raising their dividends

consistently—but their stock prices

have risen even higher, driving down

their dividend yields. The water sec-

tor’s dividend yield now stands at

1.91%, compared with 2.61% for elec-

tric and 3.99% for gas, while the util-

ities sector as a whole yields 2.81%.

Water utilities’ “dividend yields

are very low versus the average for

the S&P 500, and while they all con-

sistently grow their dividends faster

than the rest of the market...the total

dividend-driven return for water util-

ities is not so big,” Ms. Storozynski

says.

Even so, the reliability of dividends

paid by water utilities is attractive to

investors, she adds.

Indeed, York Water , with an al-

most miniature market capitalization

of about $600 million, has paid a div-

idend every quarter since 1816, the

longest streak in U.S. stock markets,

and American States Water, with a

much larger market capitalization,

$3.2 billion, has raised its dividend

annually for the past 64 years, with

an average annual total return of 15%

from 2009 to 2019—not bad for a

stock in a sector best known for its

low risk and high regulations.

Mergers and acquisitions among

publicly traded water utilities haven't

been a substantial factor in recent

years. Michael Gaugler, managing di-

rector for utilities and infrastructure

at Janney Montgomery Scott in Phila-

delphia, says that there is occasional

takeover chatter among the smaller

names, but the potential acquirers,

the larger water companies, are usu-

ally more interested in buying less ex-

pensive private or municipal water

systems or systems located in a single

state, to avoid multistate regulatory

oversight.

He also calls water utilities a

proxy for the ultrasafe but currently

low-yielding 10-year Treasurys, al-

though the sector didn’t keep up

with the record-shattering rise in

bonds (and fall in their yields) at the

end of February. Even so, “the only

way this group gets, gets clobbered

is if rates go the other way,” Mr.

Gaugler says. “And even then, it’s

probably a very soft landing.”

Mr. Ravois a writer in Seattle. He

[email protected].

BYNICKRAVO

Investors

like the

reliability of

dividends

paid by

water stocks.

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