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

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, IDEX Corporation (IEX).

Read Best Water Stocks: Pentair plc here

The IDEX Corporation sells industrial products worldwide. The business operates through 3 segments: Fluid & Metering Technology (FMT), Health & Science Technologies (HST), and Fire & Safety/Diversified Products (FDSP). These segments made up 36.1%, 40.5%, and 23.4% of sales, respectively, for 2021.

Inside each of the segments, IDEX owns a series of businesses in niche markets that own highly engineered and proprietary assets. These businesses are generally in fragmented niches in growing markets, and most of their businesses are first or second in their niche markets. This gives the business the advantage of being able to drive high returns on operating capital because each of its individual businesses has a moat.

On July 26th, 2022, IDEX reported Q2 2022 results for the period ending June 30th, 2022. The company earned $2.02 in adjusted earnings-per-share in the quarter, beating estimates by $0.13, and representing 25.5% year-over-year growth. Sales increased 16.0% year-over-year to $796 million and beat estimates by nearly $31 million.

Organic sales rose by 12% for the quarter, and this was the 5th straight quarter of double-digit organic growth. Such strong performance allowed IDEX to return significant cash to shareholders during the quarter, as the company repurchased 475,000 of its own stock in the second quarter, and hiked its dividend by 11%.

IDEX also significantly raised its outlook for the full year. The company raised adjusted earnings-per-share guidance from $7.50-$7.63 to $7.88-$7.98. Growth is fueled organically as well as by acquisitions, such as the recent purchase of Nexsight to complement the water business.

Dividend Safety & Expected Returns

IDEX stock currently yields 1.2%. The company has averaged a payout ratio of 34% over the past 5 years. The forecasted payout ratio for the current year is 30%. With a low payout ratio, we expect that the dividend is safe from any cuts or decreases because it is well-covered by earnings. The company has a strong balance sheet, with a debt/equity ratio of less than 1, and a current ratio of more than 3.

IDEX has a competitive advantage it owns and acquires businesses that are leaders in their markets with superior technologies. The strong core businesses and strong balance sheet give this company recession resiliency. We view the stock as favorably valued at the current valuation (2022 P/E of 26x); future returns will be generated by earnings-per-share growth and dividends.

Therefore, projected EPS growth of 7.5% and the 1.6% dividend yield lead to total expected returns just above 9% per year. This makes IDEX stock an attractive hold for income investors, particularly those interested in higher growth due to exposure to the water industry.

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