What a Precious Commodity
In order to survive on this planet, humans need H2O. It is such a precious commodity, yet many investors overlook the opportunity. For investors seeking income and stability, investing in water should be at the top of the list. Water is one of those sectors that will be in high demand in both good and bad economies and a great investment theme to follow for decades ahead.
Over the next decade or two, we could see a global water crisis. Access to healthy water is one of the most severe problems facing our world today. According to Water Missions International:
“Every morning, eyes slowly open to another day without hope. Children are sick and weak. There is a constant struggle to find the most basic of human needs. From the depths of each soul, a cry of despair born from generations of poverty wells up and overflows in a slow flood of tears. It is a worldwide crisis, and it stems from a lack of safe water, proper sanitation and hope found only through the message of the true “Living Water.”
The crisis is real. It steals the lives of 5,500 people each day- more than war, natural disasters, AIDS or even hunger. Yet, it rarely makes the headlines in the newspaper, nor does it circulate in water cooler conversations in the workplace. It is a silent killer – one that quietly preys on the world’s most marginalized and forgotten people.”
With water covering over 70% of the earth, you wouldn’t think that water would be such a major problem. However, 99 percent of the global water supplies are not fit for drinking, leaving just 1% available for human consumption. To further compound the problem, it is estimated that the rate of human water usage has grown twice as fast as the population over the past century. There are over 80 countries currently struggling with water shortages and it is estimated that within the next 20 years two-thirds of the world population will be facing serious water shortages.
So How Do You Invest in Water?
Unlike other commodities, water is not traded on the major markets. Instead investors looking to play on the growing demand for clean, potable water must look to ETFs and water utility stocks as a way to invest in the commodity. Most of these companies pay strong dividends (2.5%+) and have great potential for long-term capital appreciation
Looking through the water investment choices takes some time and effort. The good news is I have provided you with a head start. I started with my top ten favorite water utilities and narrowed the list down to my top two favorites. I looked at large players like Aqua America Inc. (NYSE: WTR) and American Water Works Company, Inc. (NYSE: AWK) as well as California focused American States Water Company (NYSE: AWR) and California Water Service Group (NYSE: CWT). I also went through the valuations and the outlook for other municipal players and a foreign play as well. Finally I took a look at two broad based ETFs, PowerShares Water Resources (NYSE: PHO) and PowerShares Global Water (NYSE: PIO) as a couple of ways to take a more diversified approach.
In order to find the best play I looked for stocks that were attractively priced, have good upside potential, and a yield of at least 2.50%. Here are my top 10 picks:
Top 10 Water Stocks on My Radar
|Aqua America||WTR||$26.64||$30.00||2.48%||19.28 – 26.93|
|American Water Works||AWK||$35.60||$40.00||2.81%||25.39 – 35.82|
|American States Water||AWR||$40.98||$45.00||2.73%||30.53 – 41.72|
|California Water||CWT||$18.79||$20.00||3.35%||16.65 – 19.25|
|Artesian Resource Corp||ARTNA||$21.14||$25.00||3.74%||15.16 – 21.79|
|Connecticut Water||CTWS||$31.46||$35.00||3.07%||24.76 – 32.84|
|York Water Co.||YORW||$18.32||$20.00||2.92%||15.86 – 18.43|
|Middlesex Water Co.||MSEX||$18.94||$20.00||3.91%||16.51-19.60|
|Consolidated Water Co.||CWCO||$8.56||$9.00||3.50%||6.93 – 9.88|
Prices as of 7-17-12
Let’s go through this list a bit more thoroughly. Looking at the major players in the water space we have:
Diversified U.S. Water Plays
Aqua America Inc. (NYSE: WTR). Aqua America is a public water utility. The company operates as the holding company for regulated utilities that provide water or wastewater services in the United States. It serves residential, commercial, fire protection, industrial, and other water and wastewater customers in Pennsylvania, Ohio, North Carolina, Illinois, Texas, New Jersey, New York, Florida, Indiana, Virginia, Maine, Missouri, and South Carolina. As of December 31, 2007, it served approximately 3 million customers. The company was founded in 1968 and is based in Bryn Mawr, Pennsylvania.
American Water Works Company, Inc. (NYSE: AWK). Founded in 1886, American Water Works is the largest investor-owned U.S. water and wastewater utility. It provides water and wastewater services to residential, commercial, and industrial customers, and operates predominantly in regulated markets, which account for nearly 90% of its total revenue. Its non-regulated businesses include wastewater management operations and public/private partnerships.
Both of these companies are solid picks!
California Water Plays
American States Water Company (NYSE: AWR). American States Water owns several public utilities: Golden State Water Company, American States Utility Services, and Chaparral City Water Company. More than 90% of the parent company’s assets are in the Golden State Water Company (GSWC). GSWC, formerly Southern California Water Company, is a public water utility operating in three regions in California. GSWC serves more than 250,000 customers and derives most of its revenue from residential and commercial
California Water Service Group (NYSE: CWT). California Water Service Group supplies and distributes water and related utility services. The company’s principal business is conducted through five wholly owned subsidiaries in California, Hawaii, New Mexico, and Washington. The company’s business consists of the production, purchase, storage, purification, distribution, and sale of water for domestic and industrial uses. Its utility services unit provides water system management, as well as metering and billing services.
AWR and CWT are two companies that have far too much exposure to California right now in my opinion. This is not a great state to be investing in with all of the state’s fiscal problems.
Other Municipal Water Plays
Artesian Resources (NASDAQ: ARTNA) distributes and sells water to residential, commercial, industrial, governmental, municipal, and utility customers in the state of Delaware. It serves customers through approximately 1,086 miles of transmission and distribution mains. The company was founded in 1905. Artesian Resources Corporation is headquartered in Newark, Delaware.
Connecticut Water Service (NASDAQ: CTWS) operates as a regulated water company in Connecticut. It operates in three segments: Water Activities, Real Estate Transactions, and Services and Rentals. Connecticut Water Service supplied water to 41 towns in Connecticut. The company was founded in 1956 and is headquartered in Clinton, Connecticut.
York Water (NASDAQ: YORW) engages in impounding, purifying, and distributing water in York County and Adams County, Pennsylvania. The York Water Company serves over 60,000 residential, commercial, industrial, and other customers in 39 municipalities in York County and 7 municipalities in Adams County. The company was founded in 1816 and is based in York, Pennsylvania.
Middlesex Water Co. (NASDAQ: MSEX) owns and operates regulated water utility and wastewater systems in New Jersey and Delaware. The company provides water services to approximately over 100,000 retail customers, primarily in central New Jersey, as well as New Castle, Kent, and Sussex Counties in Delaware; and wastewater services to residential retail customers in Delaware. It also serves customers in Kent and Sussex Counties through 62 operations and maintenance contracts. The company was founded in 1897 and is headquartered in Iselin, New Jersey.
Though ARTNA, CTWS, YORW, and MSEX are solid companies, their concentrated exposure within their given municipality is not quite as attractive to me as a more diversified water utility.
Foreign Water Play
Consolidated Water (NASDAQ: CWCO) engages in the development and operation of seawater desalination plants and water distribution systems in the Cayman Islands, Belize, the British Virgin Islands, and The Bahamas. It operates in three segments: Retail Water Operations, Bulk Water Operations, and Services Operations. The company also operates 12 reverse osmosis desalination plants. Consolidated Water Co. was founded in 1973 and is based in Grand Cayman, the Cayman Islands.
I have some reservations about CWCO’s financial stability and safety as well as their foreign exposure.
What about ETFs?
The ETF products have been a bit difficult for long-term investors as they have been quite volatile. The major choices here include:
PowerShares Water Resources (NYSE: PHO), which focuses on domestic water. This exchange-traded fund tracks an index of industrial firms dealing primarily in the water space: water treatment, water utilities, pipe and pump manufacturing, and so on. Most of these companies are either utilities that earn regulated returns or diverse industrial firms that have significant revenues generated from businesses other than water.
PowerShares Global Water (NYSE: PIO) instead has a global focus. The ETF is based on the NASDAQ OMX Global Water Index. The Fund generally will invest at least 90% of its total assets in companies listed on a global exchange that create products designed to conserve and purify water for homes, businesses and industries.
My Top Two Water Utility Picks
- American Water Works Company, Inc. (NYSE: AWK) remains my top pure-play water stock. The stock pays a solid 2.81% dividend that has grown. AWK is the largest public U.S. water and wastewater utility with about 16 million customers in 35 states and two Canadian provinces. The stock is not cheap by any stretch of the imagination at over $35 a share, but it’s seldom that water utility stocks go on sale very often. This still has solid upside potential as well.
- Aqua America Inc. (NYSE: WTR). This also has a solid dividend at 2.48%. They have tremendous upside potential but at $26.64 they are not cheap either.
The bottom line is that water is and will be in strong demand for quite some time. Thus the price of utilities like AWK and WTR has taken this into account. However if you are looking for income, strong growth potential, and exposure to a commodity that is a life necessity, investing in a water utility like American Water or Aqua America is a no-brainer.
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