An industry as stable as water utilities rarely gets a chance to grow quickly and excite investors. However, after more than 100 years of implementing traditional water systems, utility companies are being forced to find new and innovative methods.
According to Aqua America's 2011 Sustainability Report, the EPA estimates that public water systems will need to invest more than $335 billion over the next 20 years to continue delivering safe drinking water.
It will most likely be difficult for smaller water utility companies to come up with the necessary capital, though. Cue Aqua, the acquisition-focused company that touts itself as the "go-to" utility for smaller companies that find themselves undercapitalized.
With CEO Nicholas DeBenedictis' previous background as a federal and state environmental officer, Aqua is a champ at meeting rising EPA standards, as well as innovating new, more efficient ways to treat and deliver water to its customers. Last year, for example, the company implemented a new state-of-the-art membrane filtration treatment system in Maine and a UV-oxidation system in Pennsylvania. Both of the new systems have smaller carbon footprints and deliver clean drinking water more efficiently than previous systems.
American Water is the largest investor-owned U.S. water and wastewater services company. That scale gives the company an edge when it comes to research and development, with the company spending $2.77 million on research and development last year. (That's more than three times what Aqua even brought in last year.) Things like the desalination of saltwater to meet the needs of growing populations and new ways to recycle and reuse water are currently hot topics in the industry, and American is pioneering a lot of the solutions.
Instead of hoarding its research, though, American has decided to share it with any other company in the industry interested in working together. As the largest company in the sector, it can then use its scale to implement these upgrades quickly and maintain its No. 1 spot and market share.
The bottom line
In 2009, the American Society of Civil Engineers gave the nation's drinking water and wastewater systems a D+, making innovation an immediate necessity for water companies. Because of the open collaboration at American Water, the industry's knowledge as a whole will expand faster, and smaller companies will be able to keep up with the changing tides as long as they have the capital. If they don't have the capital, then I'm sure acquisition-happy Aqua would be happy to help.
Investing in utilities is always a safe bet for investors' money, especially with current dividend yields like American's 3.8% and Aqua's 3.4%, the latter of which has seen 20 raises in 19 years. Both companies have huge market shares and management teams with a long-term focus. This is why they are great picks for the long-term investor's portfolio. I'll be giving both companies a positive CAPScall this afternoon.
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