Water is essential for life, and like most invaluable resources, it's a big business as well.
Investors don't typically pay much attention to water stocks, as most water utilities are considered boring dividend stocks. They're reliable sources of cash flow, but the businesses are thought to be predictable.
However, that could be changing. Sources of natural water supply are drying up, which is causing communities big and small to look for new sources of fresh, drinkable water. One of the most common ways to process clean water, especially for coastal communities, is the use of desalination plants -- facilities that remove the salt from ocean water and treat it to make it drinkable.
Demand for desalination is expected to grow briskly; one research firm projects the global desalination market to more than double from $19.6 billion in 2022 to $43 billion in 2031.
Desalination plants are found all over the world, including California, the Middle East, the Caribbean, Australia, and China, and the costs associated with them are falling as the technology improves, making them more viable in more parts of the world.
As in any other emerging technology area with disruptive potential, there are likely to be several companies that capitalize on the desal boom.
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One desalination stock to get to know
Most water stocks function as conventional utilities with treatment plants, but Consolidated Water (CWCO 1.09%) has made desalination a cornerstone of its strategy. Its Cayman Water Company subsidiary owns and operates four seawater reverse osmosis (SWRO) desalination plants and serves two of the three most populated areas in the Cayman Islands, while a separate business operates three desalination plants, but does not own them. The company's CW-Bahamas business owns two desalination plants, including Consolidated Water's biggest, and the company operates 11 desalination plants in total.
Consolidated Water also provides desalination-related services. Its subsidiary, Kalaeloa Desalco, offers design, management, engineering, and construction services for desalination projects. It also owns Aerex Industries, a manufacturer of specialized products for desalination and other water treatment facilities.
Consolidated's recent results have benefited from a return of tourists to Grand Cayman, where water volume was up 16% in the third quarter. Its services business is also surging, with recurring services revenue from operations and maintenance up 48% to $5 million.
It also recognized $20 million in revenue from its PERC Water subsidiary, which it acquired in stages in recent years, for progress on an $82 million water treatment facility in Arizona that's expected to be completed by the end of the second quarter of 2024. That one-time revenue recognition drove revenue up 99% to $49.9 million.
Consolidated is also moving into the U.S. desalination market: It's started a new plant in Hawaii, and management believes that will help it penetrate other markets in the Western U.S.
Another reason to buy Consolidated Water stock
Most investors look to water stocks for dividends, and Consolidated Water hasn't disappointed on that front either. While its 1.1% yield may not be tops in the sector, the company just raised its dividend by 12%, which should foreshadow future dividend growth as it invests in desalination plants and other growth opportunities.
Utility stocks have struggled over the last couple of years as interest rates have risen, making bonds more attractive. But the sector should soon benefit from the opposite effect, because interest rates could fall over the next few years, starting in 2024; that should bring back investor interest in utility stocks like Consolidated.
Most utilities can't offer the kind of growth that Consolidated does, and its focus on desalination helps differentiate it in the industry. If climate trends persist and water grows more scarce, Consolidated should be a winner for investors as it rides the demand trend for desalination plants and services.
