Analysis: Xylem (XYL)

Xylem Inc. Propelled by Innovation and Global Demand.

Water Sector LTP initiated coverage of Xylem, Inc. (NYSE:XYL) on 7/1/25, when the stock price was $131.00. On 7/9/25, the day before this report was published, the stock closed at $131.60.

Xylem designs, manufactures, and services industrial machinery, supplies, software, and components for freshwater measurement, monitoring, testing, control, treatment, transport, and storage applications. XYL’s customers are in about 100 countries. Roughly half of its revenue comes from U.S. operations and about 25% from European operations. Its biggest U.S. competitor in the freshwater technology sector is Pentair Plc (NYSE:PNR).

Quantities

Based on XYL’s strong capital structure (debt/equity = 0.19, current ratio = 1.89), robust revenue growth (16% year-over-year in 2024), diversified customer base, and steadily increasing global demand for its products and services, XYL is a staple among institutional investors, which hold 93% of the shares. Short interest is a low 1%. Net cash and equivalent at year-end 2024 was $1.1 billion, roughly equal to adjusted net income of $1.04 billion ($4.27 adjusted EPS).

XYL should be considered a growth stock, not a dividend stock, as its current dividend is about 1.2% -- although dividends have increased for 15 consecutive years.

Headwinds

Two red flags worry some analysts: First, a fairly high price-to-earnings ratio (35.5) suggests that the stock is no bargain.

Second, XYL’s acquisition of Evoqua Water Technologies in 2023 may be dragging down its financial performance somewhat. XYL’s market cap is nearly $32 billion, and it paid $7.5 billion for Evoqua. XYL says it will take a few years before “annual run rate cost synergies” are achieved, so expect full integration by 2026, optimistically speaking.

Should investors be concerned about tariffs’ effect on XYL stock? In XYL’s Q1 2025 earnings call, CEO Matthew Pine responded to that question by saying the company’s reduced China exposure and diversified end markets support its resilience relative to peers.

Tailwinds

I want to focus on three important strengths: projected global demand, R&D initiatives, and minimized political risk.

The first tailwind is global demand for freshwater technology solutions. Quoting XYL’s 2024 annual report: “Less than 1% of the total water available on earth is fresh water, and the supply is threatened by factors such as the draining of aquifers, increased pollution and the effects of climate change. Demand for fresh water is rising rapidly due to population growth, industrial expansion, and increased agricultural development, with consumption estimated to double every 20 years. It is expected that there will be a 40% gap between global water supply and demand by 2030.” The American Water Works Association projects huge demand for sustainability-oriented water tech in its 2025 State of the Water Industry report: "Looking ahead, investments in new treatment technologies and green solutions are expected to more than double in the next one to three years, indicating a growing focus on long-term sustainability."

The second tailwind is research and development initiatives. In a rapidly growing and changing industry, especially where “sustainability imperatives” shape the competitive landscape, innovation is a key to continued success. XYL says in its 2024 annual report, “In addition to investments made in software development, which were capitalized, we incurred $230 million, $232 million, and $206 million as a result of R&D investment spending in 2024, 2023, and 2022, respectively. [Revenue for 2024 was $8.56 billion, so R&D spending was 2.7% of revenue.] We have R&D and development capabilities around the world.” In addition to its own R&D facilities, XYL has forged “innovation ecosystem partnerships” with universities, other technology firms, start-up accelerators, and venture capital firms. One such alliance is with the Reservoir Center for Water Solutions, with which it has shared office space since 2022 at its Washington, DC, headquarters. The Center is a consortium of water sector non-profits “committed to collaborate as thought leaders to solve global water issues.”

XYL’s own Xylem Innovation Labs feature an incubator, accelerator, and commercial partnerships.

Political Risk Minimized

The third tailwind I want to discuss is minimal political risk. In my opinion, maintaining a neutral, non-partisan position has become essential for long-term success in a chaotic political climate with rudderless economic policies. (See "Freedman's Doctrine on Political Risk" here.) First of all, XYL does not significantly depend on federal government contracts. The company was awarded less than $100,000 in government contracts in 2024.

Second, XYL has not been compelled to capitulate or make undue concessions to the Trump kakistocracy. According to OpenSecrets.org, Xylem made no donations to political candidates or parties in the 2024 election cycle. Xylem spent $230,000 on lobbying in the first half of 2025; the issues addressed include monitoring water recycling program implementation.

And third, in January 2021, Xylem announced a corporate Political Activities Policy. Here are excerpts from the policy:

• “Xylem will not make direct or indirect Political Contributions in support of candidates or campaigns for political office, political causes or political views. Xylem directors, officers and employees are not permitted to make any Political Contributions on behalf of or for the benefit of Xylem.”

• “At no time will Xylem coerce its directors, officers or employees to make any personal political contributions, nor will Xylem take any retaliatory actions against such individuals for making, or not making, personal political contributions.”

• “Xylem will not form, maintain, support, or sponsor any political action committees.”

You will see that we place a strong emphasis on political risk in our analyses across the board during the current trend toward greased-up capitalism in the USA.

Recommendation

Although XYL stock might seem overvalued at the moment, we believe it is insulated from political risk and structured for long-term growth. We issue a BUY recommendation on 7/10/25, as the stock closes at $131.60.. © 2025 David M. Freedman.

Dave Freedman is editorial director of Water Sector LTP. He is the former editor of The Value Examiner (NACVA) and coauthor of Equity Crowdfunding for Investors (John Wiley & Sons, NY, 2015). See his full profile here.