This article was originally published on our sister site across the pond, Fool UK.
A couple of weeks ago, we all celebrated World Water Week. You may not feel the need to set aside a whole week to celebrate water, but you might consider devoting a few hours to the subject, for the good of your portfolio.
W.C. Fields famously wouldn't touch water (something to do with fish), but you might fancy a drop, given the growing pressures on both demand and supply and the recent performance of water-related businesses. Water has been anything but weak, eclipsing more traditional equity indices, according to new figures from Standard & Poor's.
Over the past five years, the S&P Global Water Index, which covers the 50 largest listed water-based companies around the world, grew by 7.3%, outperforming both the S&P Global PMI (up just 2.9%) and the S&P 500 (-0.2%).
Steve Goldin, vice president of strategy indices at S&P, says water-based companies have been consistent performers. "Specialty indices, such as the Global Water Index, are increasingly popular with investors." He added that "we continue to witness investor demand" because of "its strong historic returns."
So should you add a sprinkle to your portfolio?
... and not a drop to drink
It's easy to take water for granted. It just falls out of the sky -- in the West, we just guzzle it.
The average American gets through 350 liters of water a day. In the U.K. it's 200 liters each, compared with just 10-20 liters in sub-Saharan Africa. It takes 1,000 liters to produce 1 kg of wheat and an incredible 13,000 liters for 1 kg of beef. We're a thirsty bunch, and as more of the world tries to emulate Western lifestyles, we will only get thirstier.
Water is like land -- they aren't making more of the stuff. It just goes round and round, in some kind of cycle. That's the scientific bit.
A growing part of the world is suffering from something called water stress, where they use more water than is naturally replaced, which means the water starts running out. Water stress is worse than other forms of stress, of course, because it kills people.
While we aren't making more water, we are making more people. The global population is projected to rise from around 6 billion to 9 billion by 2050, and all those new people will be thirsty. The water industry will have to work hard to quench the growing demand, and global warming will only make their job harder.
Water is a good industry for investors. Barriers to entry are high: There are no substitutes (although W.C. Fields recommended liquor), and it cannot be manufactured. Biomass, electricity, solar, hydrogen, or thorium could all drive our cars one day, but there is no such thing as synthetic water.
European corporations figure highly in the S&P Global Water Index, with Swiss sanitary-technology firm Geberit AG Reg the largest by weighting at 10.2%, followed by French giant Veolia Environnement
Heavily regulated water-utility companies supply generally conservative returns, but with highly drinkable dividends. United Utilities yields 5.9%, covered 1.7 times, and has a 34% operating margin. It provides water and sewage services to countries around the world, and its share price has risen by 12% to 580 pence in recent a months. Seven Trent yields 5.2%, covered 1.7 times, and has also been rising lately.
These are decent and defensive long-term holds, worth considering for the yield, especially if you can buy on weakness.
Water, water everywhere
Water stocks were causing a bit of a stir in the years before the credit crunch. Veolia's share price was coming nicely to a boil as investors tapped into its water-recycling and -desalination projects in the Persian Gulf and Australia. But its share price has since tanked. The yield is 6.3% but isn't covered by earnings at the moment.
Another French company, Suez Environnement, has also seen its share price go down the drain, to the point where it is now yielding 9.6%, covered just 0.6 times. (These aren't recommendations, by the way -- do your own due diligence first.)
I'll drink to that!
If you want to tap into the industry as a whole, you could try an exchange-traded fund, such as Claymore S&P Global Water Index ETF
As you might expect, water-company profits won't go to your head, but growing global demand should ensure that the returns keep flowing steadily in future.
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