The best water utility stocks in the first half of 2022

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As a group, water utility stocks slightly outperformed the broader market in the first half of this year. This is probably cold comfort, however, for investors in these stocks, since the first half of 2022 was the S&P500 the index’s worst first half since 1970.

For this period, the average return for a water utility stock in the group included in the chart below was negative 16%, while the return for the S&P 500 was 20% in the red.

In the first half of the year, utilities in general likely benefited from some investors’ rotation into more stable, lower-risk stocks. However, the group has probably been affected to some extent by the rise in interest rates. When rates are rising, some income-oriented investors will shift money from dividend-paying stocks to fixed-income investments.

Image source: Getty Images.

Performance of water utility stocks in the first half of 2022

This chart includes stocks of water and wastewater utilities that operate in the United States and have a market capitalization of at least $300 million (meaning they are at least $300 million). small cap). They are ranked in order of performance in the first half of 2022.

Company Market capitalization Dividend yield Projected annualized growth in Wall Street EPS over the next five years Half-year return 2022 Back to 10 years
Artesian resources (ARTNA 0.16%) $476 million 2.2% 4% 7.4% 218%
Essential utilities (WTRG 0.17%) $12.4 billion 2.3% 6.8% (13.6%) 202%
SJW Group (SJW 0.57%) $2.0 billion 2.2% 9.8% (13.8%) 238%
York Water $585 million 1.9% 4.9% (18.4%) 184%
US State Water $3.1 billion 1.7% 4.4% (20.5%) 422%
American hydraulic works (AWK 0.47%) $27.9 billion 1.7% 8.3% (20.6%) 451%
California Water Department $3.1 billion 1.8% 11.7% (22%) 286%
Middlesex Water $1.6 billion 1.3% 2.7% (26.7%) 509%
S&P500 1.62% (20%) 242%

Data sources: Yahoo! Finance and YCharts. EPS = earnings per share. Bold returns beat the return of the S&P 500. Data as of 07/01/22, excluding first-half 2022 performance, which is as of 06/30/22.

Interestingly, the four stocks that outperformed the S&P 500 in the first half of 2022 are the only ones to have underperformed this index over the past 10 years.

Artesian Resources was not only the best performer of the group in the first half of the year, it was also the only water utility in the group above that recorded a positive return during this period. The Company provides regulated water and wastewater services and certain other related services on the Delmarva Peninsula, which includes most of Delaware and parts of Maryland and Virginia.

Artesian’s EPS results in the two quarters it reported this year (the fourth quarter of 2021 and the first quarter of 2022) weren’t impressive. In Q4 2021, EPS edged down 3% year-over-year, while this metric increased 4% in Q1 2022.

My guess is that two factors could be driving the stock’s strong performance in 2022. First, the stock was underperforming relative to the group in the previous three-year period, so its valuation could have attracted some investors. Second, in January the company acquired Tidewater Environmental Services from Middlesex Water, which more than doubled the number of its wastewater customers in Delaware.

Income-oriented investors should know that Artesian’s last two dividend increases have been meager. In 2022 and 2021, the company increased its dividend by 2% and 4%, respectively.

By comparison, industry giant American Water Works – whose stock remains my favorite of the bunch – increased its dividend by 8.7% in 2022 and 9.5% in 2021. Plus, through 2026 , management expects dividend growth to average at the high end. in the range of 7% to 10%. Indeed, along with other factors, this rosy dividend growth projection makes American Water Works one of the best dividend-paying stocks you can buy and hold for a very long time.

Essential Utilities won the silver medal for their first half performance. This company changed its name from Aqua America in early 2020 when it completed its acquisition of Peoples, a large regulated natural gas utility. In total, the company has regulated operations in 10 states, eight states for water and wastewater and three states for gas. (Pennsylvania — the company’s home state — is the overlapping state in this tally.)

In general, water utilities are more conservative investments than gas utilities because demand for water and sanitation services is more stable, as are prices. Investors should keep this in mind when choosing stocks.

Rounding out the top three is SJW Group, which has regulated water and wastewater operations in California, Texas, Connecticut and Maine. This seemingly odd geographic grouping stems from SJW’s acquisition of Connecticut Water in California in 2019, which expanded its operations to include the two East Coast states.

Investors should keep in mind that a semester is a relatively short period. For a stable group like water utilities, it’s best to consider a stock’s long-term track record when making investment decisions.

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