Investing in America's most essential infrastructure

Most investors look for the next big thing: cutting-edge, never-seen-before, gonna-blow-your-mind breakthrough technology.

Robotics, semiconductors, space technology, artificial intelligence: They all make for catchy stories. And I understand why.

The engineering advancements, automotive upgrades, and graphic design improvements alone are changing the way we understand reality. And that’s to say nothing of the scientific, medical, and defense developments being achieved.

What we’re seeing today was outright unimaginable even 10 years ago. So, yes, let’s be impressed.

Let’s be very impressed.

But let’s also acknowledge the old-school force behind all this impressiveness that easily predates AI, smartphones, the internet, electricity, and even the wheel. It’s one of the few resources we absolutely need to survive.

By that, I mean water.

According to a 2024 UNESCO report, global demand for freshwater rose just under 1% annually since 1980. And considering how the data centers and AI systems being built all around the world require so much water to operate…

I imagine that number will rise significantly from here.

Yet there’s only so much of it available. While 71% of the Earth is covered with water, 97% of that is heavily salted… making it undrinkable for humans, animals, and plants. Even machines struggle to function correctly when they’re given that kind of saline solution.

It takes much more money, effort, and infrastructure to keep facilities running on salt water, which is more corrosive and prone to causing electrical issues. And while scientists and engineers are working hard to overcome those issues, any breakthroughs could be years – even decades – down the road.

As such, we’re mainly “stuck” with freshwater reliance right now. Which means that the companies providing it are in high demand.

Anytime you have high demand but limited supply, it opens up interesting investment opportunities. But when you add in essential infrastructure to that equation like we have with our water supply, it gets even better.

Because now we’re looking at long-term value creation.

For millennia, people around the world relied on wells, streams, and rivers for their water needs. So there was no infrastructure to speak of. But that started changing in Europe by the mid-1800s after the industrial revolution had truly taken off.

It took decades to install the necessary waterworks system to support growing cities once the need was recognized. Really, it was quite the feat for that time.

Problem is… there hasn’t been nearly enough done to update these networks since. And the situation is almost as bad here in the U.S.

According to the University of Michigan’s Center for Sustainable Systems, our water pipes had an average age of 45 years… in 2020. And some big cities actually rely on equipment from the late 19th century.

Now, there are always repairs being done somewhere and upgrades being made. But there’s still plenty more to be done. According to the Environmental Protection Agency (EPA), hundreds of billions of dollars more will be required to completely modernize America’s drinking water and sewage systems.

Under normal circumstances, that could be an enormous financial burden to high-quality water utilities. But these companies aren’t just selling water; they’re also operating mission-critical infrastructure the government has a vested interest in supporting.

They receive billions in funding through subsidized, low-interest loans that help them perform at peak. And that’s on top of operating regulated, legal monopolies that give them sticky business and exceptionally reliable cash flows.

That makes them the kind of company Wide Moat Research looks for.

When it comes to water utilities, American Water Works (AWK) is the undisputed heavyweight champion. Funded in 1886, it’s the largest publicly traded water and wastewater company in the country.

And it’s getting bigger every other time we look.

The U.S. water market is exceptionally fragmented, made up of thousands of municipal and community systems overall. But since it takes so much capital investment and operational expertise to maintain them, it’s easy for American Water Works to come in and make an offer.

Which is precisely what it’s been doing for years. And then it invests in the new infrastructure to improve its operations, appeal, and profits.

Better yet, there’s very little competition it has to deal with along the way. American Water Works owns some of the most important equipment any community could possibly need. Plus, what it does requires highly specialized levels of expertise and lots of money to maintain.

So it’s safe to say that its earnings prospects remain healthy from here.

In fact, with rates on the rise across multiple states, we believe it could generate about 6% earnings growth this year and as much as 9% in 2027. And this on top of a 2.6% dividend yield.

Yet shares currently trade around 23.3x earnings compared to their normal multiple near 25x.

All things considered, we think AWK could generate approximately 15% total returns over the next 12 months.

Our second water pick is H2O America (HTO). Though smaller than American Water Works, this company still knows how to grow.

For example, H2O recently announced the $540 million acquisition of Quadvest, a water utility that serves the greater Houston, Texas, area. And we all know how big of an opportunity Texas represents.

That state was already significantly sized population-wise, but it’s been growing even bigger for years now. In fact, it’s become one of the country’s most attractive water markets.

Based on Quadvest’s expected growth profile, H2O expects its Texas customer exposure to grow from about 8% to around 25% over the next three years.

Now, to support the purchase, it did raise approximately $550 million by issuing common stock. But that shouldn’t concern investors.

While equity raises can cause trouble for “normal” companies, utilities operate differently. That kind of access to low-cost capital is actually a positive just as long as they can deploy it into regulated assets that can generate attractive long-term returns.

And even before this acquisition, H2O was operating on solid footing. Its first-quarter revenue was $183 million, beating expectations by approximately $8 million thanks to high water usage and customer rate increases in states like California, Connecticut, and Texas.

Its earnings per share of $0.50 were admittedly consistent with Q1-25 as higher water production and operating costs ate into revenue. However, we see mid-single-digit revenue and earnings growth through the rest of the year. And analysts expect stronger growth potential in the next two years.

Then there’s H2O’s valuation, with shares trading around 21.5x earnings. That’s well below their historical average of 26x.

The utility comes complete with a dividend yield near 2.8% and an A-rated balance sheet. So our model suggests investors could achieve total returns of about 15% over the next 12 months.

Water may never be the market's most exciting investment theme, but that's precisely why we like it. Essential infrastructure, regulated cash flows, durable competitive advantages, and decades of investment ahead create the kind of predictable compounding that helps investors sleep well at night.

At Wide Moat Research, we'll continue looking for businesses like H2O America and American Water Works that turn life's most indispensable assets into long-term shareholder value.

Happy SWAN Investing!

Brad Thomas
Editor, The Wide Moat Daily

P.S. Check out the Wide Moat Show this week, where I’ll provide details on seven investment-grade companies (including a water utility) that are all trading at substantial discounts.

In honor of the 250th anniversary of The United States of America’s Declaration of Independence, let’s talk about the real estate investment trusts (REITs) that came out of it.

That’s not a cheap gimmick to get you to watch the latest episode of The Wide Moat Show.

The economic opportunities our Founding Fathers opened when they committed to the self-evident truths “that all men are created equal… endowed by their Creator with certain unalienable Rights” including “Life, Liberty, and the Pursuit of Happiness”…?

They’re widespread and enormous.

So we’re more than happy to point even just a few of them out right here.