Four Stocks for Watershed Investment

The current series on water supply in Latin America closes with a note on watersheds.  These large expanses of land are laced with streams and rivers draining into a even larger rivers, lakes or even an ocean.  The Mississippi River and Amazon River watersheds are so enormous they can be seen from outer space.   Watersheds are the source of all the clean water we use.  The complex geographies soak up rainwater and snow melt, collect and store the fresh water.  Microbes within the soil and rocks filter and restore the water to drinkable quality. 

Unfortunately, wastes originating from human activity often mix in with the run-off and so severely contaminate the waterways, the natural mechanisms are overwhelmed.  Pollution is linked to the formation of large dead zones with little or no oxygen in rivers, streams and lakes.  Toxic stew can even end up in ground water. 

Corporate stewardship of watersheds is vital to the rehabilitation and maintenance of the world’s fresh water supply.  Business models that include sustainable resource use are most likely to deliver long-term earnings.  Investors would do well to note which companies make clean water a priority.  Four very different companies are reviewed here.

Since the adoption of the most recent version of the International Organization for Standardization ISO 14001 in 2015, companies have paid ever more attention to the environment.  United Parcel Service (UPS:  NYSE) is an adherent to ISO 14001, that guides efficient use of resources and reduction of waste.  As a logistics and shipping company, UPS is more likely to be associated with greenhouse gas emissions from its large fleet of delivery trucks and aircraft.  However, at a local level UPS is attempting be a part of the solution as well.  UPS is one of the corporate sponsors of the Watershed Management Conference held annually in May. 

A large cap company, UPS shares are no play on altruism.  The $5 billion in net income UPS operations earned in the most recently reported twelve months, came from driving trucks and delivering packages.   That said, the mechanisms are clearly in place in the UPS business model and management culture to conserve resources.  A multiple of 14.6 times 2020 earnings and a forward dividend yield of 3.2% might make the trucks more appealing.

Enel Green Power of the electric and gas utility Enel SpA (ENEL:  MI or ENLAY:  OTC/PK) is also a sponsor of watershed clean-up activities.  The U.S. subsidiary is on board with the Merrimack River Watershed Council, which advocates and promotes responsible use of waters in the Merrimack River in New Hampshire and Massachusetts.  Of course, this is but a token expenditure for Enel, which records billions in revenue and earnings from the sale of electricity and gas around the world.  Enel has been building its environmental stewardship credentials over the years. Enel Green Power is the group’s renewable energy and power production subsidiary.  That means a portion of the company’s dividend is coming from green energy.  With a current dividend yield of 4.6% that has to be appealing for investors who are willing to take a stake in a foreign stock.

Jam and water may not seem to mix, but J.M. Smuckers (SJM:  NYSE) has made water a cause.  Smuckers is one of the sponsors of the Mill Creek Alliance trying to clean up the severely polluted watershed in the Cincinnati area.   Of course, Mill Creek is in the Smucker’s backyard and it makes sense for the iconic food and beverage company to get behind the Mill Creek clean up.  Even beyond its home turf, Smuckers is highly dependent upon clean water supplies for its products.   The jam business delivers 6.9% on its shareholders’ stake.  The board of directors is also generous with a consistent dividend that is giving investors at the current price a 3.37% yield.  

Few business models are more dependent upon quality water than The Coca Cola Company (KO:  NYSE).  Coke is a beverage producer that has made clean water a cause.  Indeed, Coca-Cola Latin America sponsored the event that inspired this series  -  a panel discussing Latin America’s Mounting Water Crisis hosted by the Americas Society/Council of the Americas (AS-COA) based in New York City.    Coca-Cola has pledged to return every drop of water used in its products.   That is a meaningful pledge given that by its own calculations Coca Cola uses over one trillion liters of water each year. 

Accordingly, the company’s efforts must be sizable.  For example, Coca-Cola supports the National Forest Foundation in its efforts to restore and manage healthy watersheds.  Coca-Cola has funded twelve restoration projects in six different national forests.  A project in the Carson National Forest in New Mexico is attempting to restore a meadow habitat along a creek tributary of the Rio Grande River.  The project is expected to replenish as much as 49 million liters of water per year that is ultimately used by the residents of the city of Santa Fe. 

Mixing beverages is good business or at least in terms of Coca-Cola’s 39.6% return on shareholder equity.  However, that success comes at a premium valuation of KO shares of 24.4 times 2020 earnings.  The company’s directors are not so generous with dividends and the dividend yield is 2.95% at the current price level.

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.