Is ZWS's Low Dividend Yield a Hidden Opportunity? Uncovering Value in Water Solutions

Water scarcity and environmental sustainability are defining challenges of the 21st century. Companies like Zurn Elkay Water Solutions (ZWS), a leader in water management technologies, stand at the forefront of addressing these issues. Yet, its 1.0% dividend yield—slightly below the 1.1% industry average—has led some investors to overlook its potential. This article argues that ZWS’s modest yield masks a compelling story of dividend sustainability and growth, positioning it as a strategic buy for income-focused investors.

The Yield Gap: Undervaluation or Opportunity?

At first glance, ZWS’s 1.0% yield (as of Q1 2025) may seem underwhelming compared to its peers. However, this overlooks the low payout ratio of 35% (dividend per share relative to earnings). With adjusted EPS rising to $0.31 in Q1 2025—a 10% jump from $0.29 in 2024—the company has ample room to boost dividends without straining its finances.

The chart above shows ZWS’s yield has consistently lagged its sector, yet its cash flow retention ratio (23.3%) leaves it far more flexible than peers. This operating leverage is critical: as earnings grow, dividends can rise while maintaining a conservative payout ratio.

EPS Growth: The Catalyst for Future Hikes

Analysts project 31.7% EPS growth for ZWS by 2025, driven by expanding demand for water filtration systems and climate-resilient infrastructure. With net sales up 5% YoY to $389 million in Q1, the company’s focus on R&D and geographic expansion—particularly in drought-prone regions—is paying off.

A 29% projected payout ratio by 2025 (down from 35% in 2024) suggests dividends could rise significantly without overextending. For context, a 25% forward payout ratio would allow ZWS to increase its quarterly dividend from $0.09 to $0.12+ by . This math alone makes the current 1.0% yield a starting point, not a ceiling.

Mitigating Historical Concerns: Earnings Stability Trumps Past Cuts

Critics point to ZWS’s dividend cuts prior to 2021, but recent performance tells a different story. Since resuming payouts in 2021, the dividend has grown 12.5% annually, with no cuts. The key difference now? Sustained earnings momentum:

• Q1 2025 net income rose 19% YoY to $41 million.
• Adjusted EBITDA hit $98 million (25.2% of sales), up from $90 million in 2024.
• Debt leverage remains low at 0.9x, freeing cash for reinvestment and dividends.

The above graph underscores how earnings growth is outpacing dividend demands, creating a safety margin for future hikes.

Cash Flow: The Fuel for Growth

ZWS’s cash flow retention ratio (23.3%) is a dividend investor’s dream. With $77 million allocated to buybacks and $15 million to dividends in Q1 alone, management is prioritizing shareholder returns while retaining liquidity. This balance ensures dividends can grow without compromising operational flexibility.

The chart highlights how cash flow has consistently outpaced dividends, a stark contrast to companies forced to cut payouts during market volatility.

Why Act Now?

ZWS’s 1.0% yield is a tactical entry point for investors seeking dividend growth. Here’s why:

1. Undervalued Relative to Growth: The stock trades at a P/E of 16x, below the Industrials sector average of 18x.
2. Low Risk Profile: With 35% payout ratio and 0.9x leverage, the dividend is secure even in a downturn.
3. Sector Tailwinds: Water infrastructure spending is expected to grow 8% annually through 2030, fueled by climate policies and urbanization.

The projected 1.1% yield by year-end 2025—coupled with potential hikes—could deliver total returns exceeding 10% annually.

Conclusion: A Dividend Sleeper with Legs

ZWS’s low dividend yield is a red herring for investors focused on growth. The combination of strong EPS momentum, conservative payout ratios, and fortress-like cash flow creates a rare opportunity: a stock poised to deliver both capital appreciation and rising dividends.

For income investors, the question isn’t whether ZWS is undervalued—it’s why wait for the market to recognize it? Act now, and position yourself to benefit as this water solutions leader capitalizes on its $389 million run rate and expanding market.

Final Call to Action: Buy ZWS before its dividend story gains traction. The math is clear: a 1.0% yield today could become 1.5% or higher by 2026, with earnings growth driving steady appreciation. This is a hidden gem ready to shine.