How to trade or invest in water company stocks

With concerns in the UK water industry over raw sewage, customer bills and company debt levels, let’s explore the landscape of the water industry and the public companies underpinning it.

What are water stocks?

Water stocks are the shares of publicly traded companies involved in irrigation, utilities, water treatment or another part of a water-related industry.

It’s important to make the distinction between publicly-traded water companies and publicly-funded companies. Water stocks refer to the former, the companies whose shares are available to buy and sell on a stock exchange. Meanwhile, publicly funded water companies describe a choice made by governments to keep companies under government ownership, and invest in infrastructure using public funds (taxes).

A lot of countries have chosen to privatise their water industries, which means the funding comes from other sources – namely international investment funds or public stock markets. This has created an environment where there can be greater investment and faster development, but the projects are primarily for shareholder profit rather than citizens.

This has become somewhat of a contentious point – especially in the UK where privatised water companies paid approximately £1.4 billion in dividends to shareholders while household bills soared and public criticism over sewage dumping grew.

But while water companies might not be popular, they are still an essential business – and one that needs funding, whether from public tax or public markets.

Types of water stocks

There are a few different types of water stocks, but they can broadly be split into:

• Utilities – the companies that treat and distribute water to the public
• Services – the companies that develop and maintain the equipment used throughout the industry

Are water stocks a good investment?

Water stocks are often seen as a good investment given the stable nature of the business – there will always be a demand for fresh, clean drinking water, sewage systems and so on.

Especially during periods of economic uncertainty, a lot of traders turn their attention to so-called defensive stocks, which typically retain value because the underlying businesses don’t rely on the state of the economy. That’s why water stocks have become a talking point over the past few years.

However, this stability isn’t always assured. As one of the most-used resources on the planet, any changes in supply and demand can have significant shockwaves throughout the economy. Already, in theory, only 3% of the global water supply is drinkable freshwater, the remainder being unusable salt water. However, due to climate change and pollution, just 1% of the supply is suitable for human consumption thanks to industrial and fertiliser run-off fouling water.

Another factor to consider when investing in or trading on water companies is their levels of debt. In the UK, the nine main water and sewerage companies have run up collective debts of over £54 billion, while paying out millions in dividends.

While high debt isn’t an inherent red flag for businesses on its own, going forward it will be increasingly difficult for companies to access the ultra-low interest rates they’ve become accustomed to. Especially at a time when the industry is being ordered by the UK government to spend over £56 billion on stopping the raw sewage leaks that decades of underinvestment have caused.

So, without access to debt, these companies will need to raise capital via other means.

In the past, they’ve looked to increase consumer bills to combat rising costs. But with consumers already facing a cost-of-living crisis, it’s unlikely the UK government will want to alienate voters any more in the run-up to an election. So where will the funding come from?

Renationalisation has been brought up again and again, but there have been concerns raised that would just shift the debt burden from the companies onto the taxpayer – which is exactly the issue they’re trying to avoid. However, previous court rulings have made it clear that there are no rights for compensation when companies are taken back into public ownership.

That leaves equity. Swapping debt for equity is a very common way of reducing the burden, so it’s not an outrageous solution. And, currently, only three UK water companies are publicly-traded stocks. The only problem for companies is that equity can be expensive to service, as shareholders expect dividends.

And that brings us full circle back to the consumer outrage over companies paying shareholders profits instead of lowering household costs. Scrapping dividends has become a popular call but killing off dividends to the sector would be the equivalent of pouring water on the last spark of investor interest. Pun intended.

In the UK, water companies are also adjusting to a new, tougher regulatory environment. From 2020-25, Ofwat has rebased the tariffs each of the companies can charge under the price review and raised their performance targets. In all of their latest annual reports, the publicly traded companies have made it clear that turnover had been impacted as a result.

What are the best water company stocks?

The best water company stocks depend on your trading or investing goals – if you’re looking for short-term volatility for speculative positions or longer-term stability for steady returns.

Please note that past performance is no indicator of future results. When opening and closing positions you should always do your research for the most up-to-date information.

Water stocks UK

The UK has three publicly listed water companies:

1. United Utilities - $6.27 billion market cap
2. Severn Trent - $5.85 billion market cap
3. Pennon Group - $1.68 billion market cap

While there are more water companies, including the largest UK water company Thames Water and the second-largest company Anglian Water, they are all private companies that do not trade on the London Stock Exchange.

Out of 83% of the UK water industry, it’s estimated that 72% is controlled by firms in 17 countries, while just 10% is UK-owned and operated.¹ As of 2022, American investment companies owned 17% of English water companies, while Australian investment firms controlled 10%.

It’s important to note that even though the three companies we’ll discuss are publicly listed, their shares are still largely owned by the same types of large infrastructure funds and private equity firms that the rest of the industry receives its funding from.

Plus, the companies' share prices are all tied very closely to the rest of the industry, so it can be a good way of getting exposure to trends. For example, all three companies saw their share prices drop following calls for tighter regulation (and potential renationalisation) of Thames Water as it was struggling with huge debt and shareholder financing.

United Utilities

United Utilities is the largest listed water company in the UK by market capitalisation. It was founded in 1995 following the merger of North Water and NORWEB. The combined company now manages the water and waste network in North-West England.

United Utilities reported that increased power costs and repair works had led to a 27% decrease in the company’s annual profits for FY 2022 – which still come in at £410 million (pre-tax).

Despite this drop, the company boosted its dividend payment to shareholders by 4.6% from 2021, up to £310 million in total.

United Utilities trades on the LSE under the ticker UU and is a constituent of the FTSE 100 (UK 100). 

Severn Trent

Severn Trent is a British utility company. It’s divided into two business divisions: Severn Trent Water – which covers the Midlands and parts of Wales – and Hafren Dyfrdwy, which services parts of north- and mid-Wales.

Shares of Severn Trent trade on the LSE under the ticker SVT, and it’s part of the FTSE 100 index.

Large shareholders of Severn Trent include foreign investment funds Qatar Investment – the Saudi company owns 4.6% - and US investment firm BlackRock (10%).

According to its annual results for 2022, Severn Trent made profits before tax and interest of £508.8 million in the 12 months ending March. That was up from £506.2 million the year before. As a result, Severn also proposed an increased dividend from £1.02 per share last year to £1.06 a share for this year.

The company said it believed paying dividends was important, and a large proportion of its shareholders were retail investors - including over 70% of its employees, and pension funds that depended on dividends every year.

Pennon Group

Pennon Group is a water utility and waste management company based in Exeter. Most of its revenue comes from its South West Water subsidiary which serves Cornwall, Devon and parts of Dorset and Somerset.

Like the other two UK companies, its shares are listed on the LSE, but due to its slightly smaller market cap, it’s on the FTSE 250 index instead.

Pennon – like the other two UK stocks – is known for its dividend policy, which it expects to grow until 2025. In 2020, it sold its Viridor waste management company for £3.7 billion to a private equity company – all the £1.7 billion profit it made from the deal was distributed to shareholders by way of a special dividend.

Water stocks US

In contrast to the UK's privatised water market, just 10% of the US population gets its water from private companies. 33 of the 52 states rely more on public, state-owned water solutions than private companies.

However, there are still thousands of private water companies that investors can choose from. Two of the biggest names in the US water industry include:

1. Xylem – $23.96 billion
2. Pentair – $10.94 billion

Xylem

Unlike the utilities companies we’ve covered so far, Xylem is a water technology company. It develops and manufactures products involved in the transportation and treatment of water, as well as pumping and heating, and data analytics.

Xylem serves consumers in over 150 countries but sees emerging markets as its biggest opportunity to make clean water available through technological advancement.

In early 2023, Xylem acquired water treatment company Evoqua Water Technologies for $7.5 billion, which will help the company secure its position as an industry leader.

Xylem’s revenue for 2022 was up more than 6% to $5.52 billion and reported profits of $355 million – although that was down year-on-year. The company still announced a first-quarter dividend in the amount of $0.33 per share, an increase of 10% year-on-year (YoY).

Pentair

Pentair is a US-listed water treatment company which manufactures solutions for filtering bacteria and other pollutants. Most of Pentair’s business (2/3rds of its revenue in 2022) is in residential pools, but it also has commercial segments that primarily serve the food and beverage market.

Despite being headquartered in the UK, its shares trade on the New York Stock Exchange.

In July 2022, Pentair completed its acquisition of Manitowoc Ice, a leading provider of commercial ice makers, which aimed to strengthen its commercial network.

Pentair’s revenue in the 12 months ending June 30 2023 was $4.17 billion – that’s up 3.67% from 2022. Its gross profit was $1.45 billion – up 7% YoY. The company has raised its dividend 47 years in a row.

Water ETFs

If you want broader exposure to the water industry, you could choose a water stock exchange-traded fund (ETF) instead. These instruments invest in a basket of stocks from across different categories and sectors, giving you a diversified position in just one trade.

A popular example is the Invesco Water Resources ETF, which tracks the Nasdaq OMX US Water Index, replicating the performance of exchange-listed US companies involved in purification and conservation.

How to start trading or investing in water companies

With City Index, you can take your position on water stocks’ price action using CFDs, enabling you to go long or short. Follow these steps to get started:

1. Open your City Index account and add some funds
2. Log in to our award-winning Web Trader platform or download our mobile trading app
3. Search for any of the stocks listed above
4. Choose to buy to go long, or sell to go short

Alternatively, you can buy and sell our full selection of stocks – plus indices, forex, commodities and more – with a City Index demo account, which gives you virtual funds to try out trading on live markets with zero risk.

¹The Guardian, 2022