Why Water Companies Like Veolia Environnement and Pentair Enjoy Lasting Demand

Water-related companies offer some appealing dividends, too.

May 13, 2014 at 7:45PM

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some water-related companies to your portfolio but don't have the time or expertise to hand-pick a few, the PowerShares Global Water (NYSEMKT:PIO) ETF could save you a lot of trouble. Instead of trying to figure out which stocks will perform best, you can use this ETF to invest in lots of water-related companies simultaneously.

On your own you might not have selected Pentair, Ltd. (NYSE:PNR) or Veolia Environnement SA (NASDAQOTH:VEOEY) as water-related companies for your portfolio, but this ETF included them among its 30-some holdings. The ETF has lagged the world market over the past five years, but topped it over the past year. Our planet will only need more and cleaner water as time goes on, so water-related companies should enjoy long-term demand. (Indeed, some expect demand to exceed supply by 40% by 2030.)

To appreciate the potential demand more, consider that, according to the World Health Organization (WHO), "About 2.6 billion people -- half the developing world -- lack even a simple 'improved' latrine and 1.1 billion people has no access to any type of improved drinking source of water." The WHO, world governments, and others are aiming to change this sorry state of affairs, which is likely to require more products and services from water-related companies. Keep in mind that agriculture also requires a lot of water.

The ETF's Basics
ETFs often sport lower expense ratios than their mutual fund cousins. The PowerShares Global Water ETF, focused on water-related companies, sports an expense ratio -- an annual fee -- of 0.82%. That's a bit on the steep side for an ETF, but it's still well below the typical stock mutual fund. You don't have too many choices, either, if you're looking for an ETF focused on water-related companies. There are three main alternatives: the PowerShares Water Resources Portfolio ETF (PHO), the First Trust ISE Water Index Fund ETF (FIW), and the Guggenheim S&P Global Water Index ETF (CGW). This ETF's expense ratio is higher than the others', but it also sports a significantly higher dividend yield than them, too, recently yielding 1.5%.

This ETF is fairly small, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

A closer look at Pentair, Ltd.
Pentair serves the water industry with valves, controls, pumps, filtration equipment, and a host of other products and services. Its stock yields 1.3%, and its payout has increased by nearly 40% over the past five years. The company bought Tyco's flow control operations in 2012.

Pentair's latest quarterly results featured revenue down almost 3% over year-ago levels. That was below expectations, which, coupled with weak near-term revenue projections from management, helped send shares down roughly 7%. Adjusted earnings, though, were up 26%, with management expecting more double-digit growth. Pentair is in the middle of buying back more than $2 billion worth of shares.

In a conference call, management noted:

Overall, while we are not satisfied with our top line performance in the first quarter, we continue to deliver on productivity and synergies and see strengthening of the top line as we enter the seasonally strong period for our residential and commercial businesses. Our backlog gives us further confidence in our expectation for an accelerating top line growth rate in the second half of the year as well.

A closer look at Veolia Environnement SA
France-based water specialist Veolia Environnement has seen its stock surge more than 50% over the past year, proving that seemingly boring companies can be quite exciting. Founded well before our Civil War, the company has grown to nearly $10 billion in market size and employs more than 200,000 people. Veolia Environnement SA recently yielded an appealing 5.4%.

Following the company's latest earnings report, management reaffirmed its objectives for 2014: "a return to revenue growth; a growth in our adjusted operating cash flow at constant exchange rates around 10%, and as you've seen, our Waste and Water business are on track to achieve this early this year; a reduction in our financial expenses; a significant growth in adjusted operating income; and significant growth in adjusted net income."

Bulls like Veolia's big chunk of a huge $400 billion market, while bears worry that it can't grow briskly and that it may have overexpanded.

The big picture
It makes sense to consider adding some water-related companies to your portfolio. You can do so easily via an ETF. Alternatively, you might simply investigate an ETF focused on water-related companies and then cherry-pick from its holdings after doing some research on your own.

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Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, owns shares of Veolia Environnement (ADR). The Motley Fool recommends Veolia Environnement (ADR). The Motley Fool owns shares of Pentair. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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