Xylem Talks Sustainability Along Its Water Pipe

Earlier this month water utility Xylem, Inc. (XYL:  NYSE) reported financial results for the fourth quarter and year ending December 2019.  Xlyem earns its way delivering potable water, transporting and treating waste water and dewatering industrial sites.  The company’s residential and commercial customers circle the globe in 150 different countries.  Revenue crept up to $5.25 billion from $5.21 billion in the previous year.  Operating income increased slightly to $697 million after excluding one-time restructuring and impairment charges.  Xylem is nothing if consistent in the delivery of earnings to shareholders. 

Importantly, Xylem generates operating cash flow.  In the year 2019, the company converted 16% of each sales dollar into operating cash flow.  This was an impressive improvement over the prior year when only $0.11 from each sales dollar ended up as operating cash.  Even at the lower sales-to-cash conversion rate Xylem’s cash machine powers through an ambitious capital budget and supports the company’s equally generous shareholder dividend.

In the past investors could stop at the operating cash flow line and click the buy button on XYL shares.  However, as the specter of environmental crisis looms over humanity’s shoulder, astute investors need to take a couple more steps.  Companies peddling resources have more than earnings performance to prove.  Xylem and each and every water company must prove their operations actually sustain the resource for future generations. 

Water utilities present an interesting opportunity for investors to evaluate sustainability.  For the most part success in economic resource exploitation may be evident in profit margins without need for significant adjustment of unspoken, off-balance liabilities.  If water utility wastes water it turns up in the gross margin.  Greenhouse gas emissions might evident on the surface, but can be estimated from facility descriptions and due diligence on energy sources.    

For their part Xylem management talks a good story.  In June 2019, the company released the most recent edition of its sustainability goals.  One of its many stated goals for the year 2025, is to source 100% of the company’s energy needs from renewable sources.  Apparently, Xylem also intends to improve its water handling record by recycling water at 100% of its facilities around the world  and reduce water losses by 16.5 billion cubic meters over the current five-year period.  

There is a long list of goals in Xylem’s sustainability report.  The tome is short, however, the company’s progress in reaching its targets.  The report does make at least two concrete claims:  the reduction of greenhouse gas emissions by 18.4% and a decrease in water intensity by 17% through water reuse processes.  Xylem engaged an independent certification source ERM CVS to verify its claims.

Xylem still has a way to go before it can be considered stalwart protector of the environment.  That said, it has taken several steps in the right direction and can be considered at least a decent friend.  Investors must continue to scrutinize Xylem for proof the company accomplishing sustainability in its water pipes and not just talking about it.    

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.