Water is one of the most vital components of life, asserts Bob Ciura; in this special 5-part report, the editor of Sure Dividend highlights his current top recommendations in the water sector.

Demand for water will never go away, and due to rising global populations, will only increase over time. As a result, investors might consider adding water stocks to their portfolios.

In general, water stocks have simple business models and are resilient to recessions thanks to the essential nature of their business. This article will discuss a top water stock, Pentair plc (PNR).

Business Overview & Recent Events

Pentair operates as a pure-play water solutions company that operates in 3 segments: Aquatic Systems, Filtration Solutions, and Flow Technologies.

Its financial performance has remained strong this year, even with the broad economic slowdown. Pentair reported its second quarter earnings results on July 26. Quarterly revenues of $1.02 billion during the quarter, which was 8% more than the company’s revenues during the previous year’s quarter, a result that missed estimates slightly.

Core sales, which excludes the impact of currency rate movements, acquisitions, and dispossessions, were up 12% year over year. Earnings-per-share of $1.02 for the second quarter, rose by 21% year over year. Pentair’s earnings-per-share beat the analyst consensus by $0.02.

The company reiterated its guidance for the current year, now forecasting earnings-per-share in a range of $3.70 to $3.75. At the midpoint, this would represent another year of double-digit growth for the company.

We expect a ~6% earnings-per-share growth rate from Pentair over the next five years. The company should be able to achieve this growth through a combination of rising revenues, which will be possible thanks to organic growth and acquisitions, and through tailwinds from margin expansion and share repurchases, which will lead to further declines in Pentair’s share count.

Dividend Safety & Expected Returns

Pentair stock currently yields 1.7%. This is just slightly above the average yield of the broader S&P 500 Index. However, Pentair makes up for this with a long history of dividend growth. Pentair has increased its dividend for more than four decades in a row, when adjusted for spin-offs, which makes it a member of the Dividend Aristocrats list. With an expected payout ratio of 23% for the full fiscal year, Pentair’s dividend is safe, with room to grow.

The company’s main competitive advantage is its high operating efficiency. Pentair utilizes a strategy called the Pentair Integrated Management System, or PIMS, which has kept its organizational structure lean, and allowed the company to expand its profit margins. Pentair is a leader in the niche markets it targets, and through tuck-in acquisitions, Pentair can grow its size and scale further over time, once the current inflationary period subsides.

Future returns will be boosted by the significant undervaluation of Pentair stock right now. The stock trades for a 2022 P/E of 12.9, significantly below our fair value estimate of 17, which is the 10-year average P/E multiple. The combination of expected EPS growth, expansion of the P/E multiple, and dividends, leads to total expected returns of 13% per year over the next five years for Pentair stock.

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