Nearly half the population of the globe suffers from water shortage for at least one month a year.
Clean water is even rarer, at least for one-tenth of the global population.
Due to drastic climate change, water shortages are expected to impact two-thirds of the world’s population by 2025.
So from an investment perspective, investing in the best water stocks in Canada could be an interesting proposition.
International Perspective on Water Stocks
Water stocks have increasingly been gaining attention on a global scale. As clean water becomes rarer, countries around the world are paying more attention to their water infrastructure, sourcing, and purification methods.
The situation in Canada mirrors global trends. While Canada has a vast reserve of freshwater, the efficiency of its utilization and distribution remains a significant point of interest for investors.
Regions like Africa, parts of Asia, and even Europe are experiencing varying levels of water scarcity. For investors, this presents an opportunity. International companies, especially those from countries with limited water resources, are investing heavily in water treatment and desalination projects.
Best Water Stocks In Canada
Canada has abundant freshwater resources, making water-related investments quite unique. The TSX has a handful of stocks tied directly to water, which I mention below.
1. Primo Water
Primo Water offers its consumers filtered water in bulk, i.e., one, three, and five-gallon water bottles, typically used with a dispenser. Customers can directly replace empty bottles with filled ones (that can be delivered to their doorstep) or use a filling station.
Either way, the company provides a considerable environmental service by replacing millions of disposable water bottles.
The main competitor of a company like Primo Water is tap water, available through government or private utilities.
This makes the US a more conducive North American market for the company because fewer people in the US drink tap water, whereas, in Canada, a significant bulk of the population uses tap water as their main drinking water.
This is where Primo Water’s geographically diverse consumer base is an asset.
However, a major benefit that a company like Primo Water enjoys is that they rarely change once a customer buys a Primo Water dispenser and starts using the water filtered/prepared by the company.
Primo is a new company, but its beverage-related roots go back a hundred years, indicating supply chain maturity.
The company’s financial performance, primarily its revenue stability and recovery, and the performance of Primo stock have been quite decent in the decade between 2012 and 2023, especially considering that it has pivoted twice in that period.
Once was when it repositioned itself from soda to drinking water (2014) and when it rebranded from a decades-old name (Cott) to Primo in 2022.
This resilience inspires a lot of confidence in the management. It’s a reliable pick for the long term for both its dividends and capital appreciation potential.
2. H2O Innovation
H2O Innovation is all about water filtration and treatment and wastewater treatment.
It has three business segments – technologies and services associated with water/wastewater treatment, specialty products (chemicals and filter substances associated with their technologies, and Operations and Maintenance (O&M) services.
Collectively, these services give them an enormous market reach. They can partner with local governments/municipalities and communities to provide holistic water and wastewater services.
They can work with a wide range of industries (most businesses have some water filtration requirements). The specialty product unit supports their existing systems and technologies and broader membrane-based water filtration.
It has experienced decent growth in some segments and meteoric growth in others.
The company had six locations and 160 employees till 2015, and now it has over 1,000 employees, over 750 North American installations, and operates 600 utilities (2022 numbers). The utilities under its purview grew by over 100% in just one year.
The financials experienced just as decent a growth – 3.75 times between 2015 and 2022, and almost 85% of the revenues in 2022 were recurring. This indicates the company’s ability to hold on to the business it has won.
Its cost-heavy operations throttle the cash flow from operations (in some years more than others), and the debt is relatively high, but considering its growth, recurring revenues, and the fact that it doesn’t pay dividends, make its financials less of a threat and more of a hurdle the company is expected to overcome soon.
If you look at this company from a conventional financial perspective, it may not look like a promising prospect.
But if you consider its organic growth, operational reach, and product and service portfolio, it might become more attractive. The stock’s performance so far has been modest at best, but its organic growth has picked up pace, and the stock might follow.
3. BQE Water Inc
BQE Water caters primarily to the mining industry. It provides filtration services to the mining sector clients and treats their water discharge for trace minerals, some of which are recovered while others are simply neutralized in order to lower the contaminant concentration of water below dangerous levels.
As a micro-cap company catering to a limited market, BQE Water may not seem as promising as other water stocks with a much wider reach. Still, it’s well-positioned to take advantage of the shifting corporate focus on ESG.
Mining companies have multiple environmental challenges, and BQE water offers an efficient way of managing at least one.
Many of its clients include battery metal companies mining for metals like zinc and precious metal companies. It also helps them treat the water used in the refining process.
The battery metal exploration and refining industry already has significant momentum and may remain strong for years, even decades. That gives the company plenty of growth opportunities in the future.
The company is a shadow of its former, glorious self (pre-recession) but has seen decent growth in the past decade – 138% between August 2013 and August 2023. Its financials are also steadily improving.
But the best case I can make for this company is its level of insider ownership – over 55%. The company has almost no debt.
You should understand the risk-reward ratio the company offers. In its current state, it may remain stagnant or simmer down to an even smaller market value if it doesn’t land any major projects in the future.
But the other side of the coin is that even a couple of sizable contracts can create a lot of optimism around the company.
4. Algonquin Power & Utilities
Algonquin Power and Utilities, as the name suggests, is not a pure-breed water stock.
It’s a utility company that specializes in power generation and electrical utility, and water makes up the smallest segment of its revenue from the three utility businesses (electricity, natural gas, and water) – just 13% in 2022. This is simultaneously its strength and weakness.
Ironically, its water and wastewater connections outnumber both electric and natural gas customers (individually, not collectively). Water lines (11,170 kilometres) also make up a significant portion of its infrastructure and are worth about $1.7 billion.
Algonquin is still struggling to recover from the slump it was partially driven into by its decision to slash dividends by 40% and sell about a billion dollars worth of assets.
This may put you off as well, but it’s not as bad news for new investors as it was for old ones. They experienced a significant reduction of the accumulated growth (as the stock fell) and a massive dividend cut.
But the people that are investing in the company now are getting more financially stable dividends and operations that are not as weighed down by debt as they were a few years ago.
Considering its dividend and growth history, a more efficient Algonquin may prove to be a powerful addition to your portfolio. However, it’s worth noting that the long-term liabilities have steadily grown over the last few years.
As a utility business, Algonquin should have been financially safer than it currently is, and most of its debt is tied to acquisitions.
But you should also consider its strengths, international reach, and a focus on renewables when evaluating this investment.
5. American Water
American Water is a pure-play water and wastewater utility company that operates in 14 states and provides water and wastewater services to about 14 million people (over 4.2% of the total population).
The company had about 2.3 million connections by the end of 2013, and that number grew to about 3.4 million customer connections in the first half of 2023.
Annually, that’s roughly 111,000 customers acquired each year. It’s also a trusted partner of the American military installations.
It serves 18 installations already and is well-positioned to provide services to about seventy more. A significant portion of new customers become part of the American Water family through acquisitions.
The investment makeup of the company is also quite different from the other companies on this list. Over 89% of the company is owned by institutions, and the largest chunk is with Vanguard Group, which owns 12% of the company.
This makes the stock more stable than others on this list because institutional investors rarely make panic-induced investment decisions.
Another major strength of this utility stock is that even though it’s an acquisition-oriented company that is consolidating the highly fragmented water utility industry in the Eastern States through a well-defined acquisition strategy, this doesn’t impact its financials.
The operational income has been steadily growing (despite revenue fluctuations), and its dividends are rock solid (financially).
You may be hard-pressed to find a reason not to invest in American Water. Everything from its growth potential to dividends and financials is attractive. The risk is minimal, and the reward is both good and consistent.
Should you Invest in Water Stocks?
As grim as it may seem, global warming is happening, and most experts agree that we might start seeing its drastic adverse effects in the next few decades. One of those effects is water scarcity.
Having a stake in companies that control cleaning and supply of water (among other things) can become beneficial over time.
In addition, many water-oriented utility companies, especially in the US, are financially healthy and profitable investments.
If you wish to raise the ESG profile of your portfolio, investing in water stocks can be a great way to do it.
However, this outlook should be taken with a grain of salt. Canada has the fourth-largest freshwater reserves in the world, so even if water scarcity causes the demand to spike, it will likely happen in Canada later than in most countries.
Michael Burry certainly thinks water is a good investment. However, he is investing in it in a more roundabout way.
Water Stocks and the Energy Sector
Water plays a crucial role in the energy sector. From hydraulic fracturing, which requires significant water resources, to cooling in nuclear power plants, the integration of water resources is undeniable.
As the global energy landscape shifts towards more sustainable and eco-friendly methods, the reliance on water will only grow.
Investors keen on water stocks should not overlook this interplay. Companies that offer wastewater treatment solutions for industrial applications, particularly within the energy sector, stand to benefit immensely.
Environmental, Social, and Governance (ESG) Factors in Water Stocks
In recent years, ESG factors have become central to investment decisions. For water stocks, this is particularly relevant. Environmental concerns like preserving water quality, ensuring sustainable water sources, and reducing waste are central to the operations of these companies.
Moreover, on the social front, access to clean water is a fundamental human right. Companies that prioritize providing clean water solutions to underserved communities can demonstrate strong social responsibility, enhancing their attractiveness to ESG-focused investors.
From a governance perspective, transparent operations, adherence to regulatory standards, and active stakeholder engagement can position a water company as a leader in its field, further driving investment appeal.
Companies like BQE Water Inc., which provides filtration services primarily to the mining industry, align well with ESG principles by ensuring water discharge is treated for trace minerals, making the environment safer and reducing contamination risks.
What are some of the best water ETFs available in Canada?
There were several Exchange Traded Funds (ETFs) globally focusing on water, and a few have exposure in Canada.
- iShares Global Water Index ETF (CWW): This ETF tracks an index of global companies in the water industry, giving Canadian investors international exposure to this sector.
- Invesco Water Resources ETF: While not Canadian-specific, this ETF is popular among those looking to invest in water resources. It focuses on US companies, but Canadian investors can access it on international trading platforms.
- First Trust Water ETF (FIW): Again, while this is a U.S.-based ETF, it’s another option for Canadians looking to invest in the water sector.
How To Buy Water Stocks In Canada
The cheapest way to buy stocks is from discount brokers. My top choices in Canada are:
- 105 commission-free ETFs to buy and sell
- Excellent customer service
- Top-notch market research tools
- Easy-to-use and stable platform
- Stock and ETF buys and sells have $0 trading fees
- Desktop and mobile trading
- Reputable fintech company
- Fractional shares available
To learn more, check out my full breakdown of the best trading platforms in Canada here.
If you would rather invest in a commodity that’s scarce now, consider helium stocks.