Why water could be the next hot commodity
Water has emerged as the next big idea among some high-profile investors. Momentum has picked up since Michael Burry, the investor who famously predicted the subprime mortgage meltdown characterized by the film The Big Short, stated that he is focusing all of his future trading activities on water as a commodity.
The investment case is fairly straightforward: water is a basic need and is vital for human life. Demand for water should only grow from here, as global populations expand, particularly in the emerging markets, where under-developed economies are growing at a rapid pace.
One way potential investors can gain exposure to water is through the publicly-traded water utilities. These companies are part of a smaller subsect of the broader utilities sector. Like their electric utility peers, American Water Works Company (NYSE: AWK) and Aqua America (NYSE: WTR) are highly stable companies with defensive business models, potential for growth, and compelling dividends.
These stocks have soundly beaten the S&P 500 over the past decade, and stand a good chance of outperforming it going forward.
Actionable investment opportunities in water
Many water utilities are regulated, similar to electric utilities, which allows them to pass along regular rate increases to customers on an annual basis. This gives them a steady stream of earnings growth from year to year, which is then passed through to shareholders as dividends. For example, American Water Works and Aqua America have been highly rewarding investments as they have paid increasing dividend streams for the past several years. Each of these water utilities should continue to grow earnings and dividends over time.
Founded in 1886, American Water Works is the largest publicly traded U.S. water and wastewater utility company. By market capitalization, it is an $11.5 billion company. It provides regulated and market-based drinking water, wastewater and other related services to an estimated 15 million people in 47 states and Ontario, Canada. American Water Works has grown at rates much higher than electric utilities, which reflects the appeal of water as an investment.
Last quarter, the company grew revenue and earnings by 5 percent and 10 percent respectively, and management expects another 7 percent earnings growth in 2016. Last year, American Water Works raised its dividend by 10 percent, and it has raised its dividend each year since its initial public offering in 2008. As of its last closing price the stock yields 2.1 percent. Analysts are bullish on American Water. The average analyst forecast calls for the company to grow earnings per share by 7 percent this year.
Aqua America grew revenue by 5 percent last quarter thanks to 9,300 customer additions over the first nine months of the year. This growth allowed the company to raise its dividend by 7 percent in August, and the stock now yields 2.2 percent. Aqua America has paid a quarterly cash dividend for 71 years, and has come through with 25 dividend increases in the past 24 years.
Aqua America’s subsidiaries made 16 customer acquisitions last year. This will help keep the company’s growth trajectory on track. Indeed, Aqua America expects total customer base growth of 1.5 to 2 percent. Analysts expect the company to grow earnings per share by 5.5 percent in 2016.
For investors, the key takeaway is that there is a way to invest in water. The water utilities generate consistent profits from year to year, as water is about as recession-resistant a business as one can find. These utilities produce above-average dividend yields which are especially valuable to income investors in this low-rate environment. In addition, more cautious risk-averse types of investors such as retirees can capture relatively high yields without taking on abnormally high levels of risk.
Companies to Watch:
Other publicly-traded water utilities include:
York Water (NYSE: YORW)York Water serves 47 municipalities and an estimated population of 180,000, through approximately 64,000 service connections. Its fundamentals are strong. Over the first nine months of 2015, revenue and earnings per share grew 3 percent and 14 percent, respectively.
In 2015, York Water raised its quarterly dividend by 4 percent, to $0.1555 per share. That comes out to $0.62 per share annually, a 2.2 percent yield based on the stock’s recent closing price. York has paid consecutive dividends for 200 years, dating all the way back to York’s first quarterly dividend payment in 1816. It has also raised its dividend for 19 years in a row. According to the company, York Water is believed to have the longest track record of consecutive dividend payment of any company in the United States.
California Water Services Group (NYSE: CWT) yields 2.75 percent right now and has paid more than 280 consecutive quarterly dividends. Moreover, the company has increased its dividend for an impressive 49 years in a row. California Water Service reported flat earnings per share over the first half of the year, but its $0.21 per share in profits last quarter was more than enough to cover its $0.168 per share quarterly dividend.
American States Water (NYSE: AWR) has a 1.9 percent dividend yield. American States Water has provided investors with more than 300 consecutive quarterly dividend payments, and has increased its payout for an amazing 61 years in a row, including a 5 percent dividend raise in 2015. Approximately 79 percent of American States Water’s revenue comes from its regulated business. This allows for steady earnings and dividend growth each year. Analysts expect American States to grow earnings per share by 6 percent in 2016.
Bob Ciura is an independent equity analyst. Since 2012, his work has focused on fundamental investment analysis of publicly-traded companies in the energy, technology, and consumer goods industries. Bob has a Bachelor's degree in Finance and an MBA in Finance.