by Aaron Levitt | March 26, 2013 9:26 am
Even though water consumption has more than doubled the rate of population growth, investors pay little to no attention to the essential commodity.
Well, until this year, that is.
Interest in blue gold has finally caught up to the rest of the commodities complex and stocks in the sector have surged to new highs. Heck, the broad index measure of the sector, the PowerShares Water Resources ETF (NYSE:PHO), has climbed 22% over the last 52 weeks.
Despite the fact that water covers much of the earth’s surface, only about 3% of it is currently considered fresh and suitable for consumption. That small figure doesn’t even take into account the fact that much of the fresh water is still locked in the polar ice caps.
At the same time, rising global populations are draining these supplies at exponentially increasing rates. According to the International Water Management Institute, water demand is expected to increase by 18% in developed countries by 2025. In the booming emerging world, it will jump by 50%.
As a result, the U.N. Food and Agricultural Organization estimates that over 1.8 billion people will live in regions with absolute water scarcity by 2025, while two-thirds of the global population will be under what the agency calls “water stress conditions.” Plus, new sources of industrialization, consumerism and agriculture demand will put additional pressure on water supplies.
Add these supply shortages to the insufficient distribution networks, rising pollution and the lack of treatment systems … and you have a recipe for rising prices.
In fact, the American Water Works Association predicts the cost of repairing and expanding water infrastructure in the U.S. will top $1 trillion over the next 25 years. The group also estimates that those infrastructure costs will nearly triple the size of a typical family’s water bill, adding on between $300 and $500 per year above current costs.
All of these factors have investors finally turning towards water in a big way.
Until potable water is traded on exchanges with spot and futures pricing (don’t laugh, some analysts think that scenario is coming sooner than later), investors are forced to bet on the companies that provide infrastructure, filtration, consumption and desalinization products … or to play publicly traded water utilities.
Like timber REITs, water utilities don’t represent a perfect correlation to water pricing since they are heavily regulated. Still, they are a solid play on water consumption and demand, as people use their services and investors get hefty dividends based on said use.
All in all, the opportunities for fresh water suppliers are set to improve as they capture the economic benefit of dealing with a finite natural resource with no substitute and projected supply and demand imbalances. With that in mind, here are three names to consider in the space:
Aqua America (NYSE:WTR) has made a name for itself — and grown quite a bit — by engaging in a hefty dose of acquisition. As some municipalities struggle with budget cutbacks, many are privatizing their water authorities. This shift has benefited WTR, as it has been quite successful in adding these assets. Its latest purchase added another 6,000 customers to its system.
Plus, Aqua America also has another ace up its sleeve — the growth in natural gas fracking.
Last year, WTR partnered with Penn Virginia Corp. (NYSE:PVA) to build a pipeline that will supply fresh water to energy firms’ drill sites in the Marcellus shale. That has helped Aqua America diversify its portfolio outside of the core business of regulated water services, and beef up its yield to 2.3%.
For investors seeking sheer size, American Water Works (NYSE:AWK) could be the way to go. The firm operates in the U.S. and Canada, offering water and wastewater services to 1,500 communities in 16 states. And the scope of its assets is breathtaking. AWK owns 680 water treatment plants and numerous groundwater wells, water storage facilities and pumping stations … on top of 46,000 miles of pipelines.
The company has certainly earned its $7.2 billion market cap.
In fact, that market cap could be expanding even more over the next few years. Shares have surged 47% over the past two years … and over the next five, analysts are projecting annual earnings growth of 8%.
And similar to WTR, American Water Works yields 2.5%.
Finally, investors looking for a little more yield out of their water investment need to think small. The Middlesex Water Company (NASDAQ:MSEX) isn’t nearly as large as its two rivals on this list, but that doesn’t mean it can’t pack a punch.
The main appeal of Middlesex is the fact that it has paid dividends continually since 1912 and has increased its dividend for last 40 consecutive years. Right now, the firm’s 3.9% yield is a sector high.
And driving that dividend growth has been continually improved earnings. MSEX’s latest numbers for the fourth quarter were 42% higher than the previous year-over-year quarter.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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