Investing in utilities that serve up basic human necessities can offer the stability many investors crave, but it pays to keep your eyes open for the best opportunities. Electric utilities have long been favorites, but utilities that provide water services have also become investor darlings over the last decade. There's more to selecting the right stock than finding a dividend and letting it grow, so let's take a trip around the world to find some of the best opportunities in water and power.
Providing for the greatest need
The U.S. Energy Information Administration, or EIA, predicts that world energy consumption will increase 40% by 2035. That sounds like a big opportunity until you realize that world energy production is expected to increase more than 70% by the same year. On the other hand, the 2030 Water Resources Group predicts that water use will increase 53% by 2030, which is going to be 40% more water than is now reliably available. Water utilities thus look like they are going to surpass electricity providers.
Crossing the streams
It's worth taking a look at how these utilities have done in the past to gauge their future potential. The areas these companies service and the size of their customer base are both important. A large, but fully connected, service area won't provide the same long-term growth as a region where many people are still waiting to get hooked up.
|
Company |
10-Year Share Price CAGR |
10-Year Dividend Per Share CAGR |
Current Dividend Yield |
Service Area and Population Served (Where Available) |
|---|---|---|---|---|
| Aqua America (NYSE: WTR) | 7.8% | 7.5% | 3.1% | 3 million people in 13 U.S. states, primarily the Eastern half of the United States. |
| American Water Works (NYSE: AWK) | 18.7%* | (8.5%)* | 3.1% | 15 million people in 30 U.S. states and parts of Canada. |
| Consolidated Water | 6.9% | 4% | 3.4% | Cayman Islands, Bahamas, British Virgin Islands, Belize, and Bermuda. |
| Sabesp (NYSE: SBS) | 32.2%** | 28.6%** | 4.1% | Provides water service to 23.7 million people in Sao Paulo state, Brazil. |
| National Grid (NYSE: NGG) | 6.3%^ | 4.2%^ | 7.8% | Millions of people in Great Britain, and 3.4 million people in New England and New York. Also includes natural-gas service. |
| Southern Company (NYSE: SO) | 10.1% | 3.3% | 4.6% | 4.4 million people in the southeastern United States, as well as wholesale electricity sales. |
| Huaneng Power International (NYSE: HNP) | 7.5% | 8.7% | 6.7% | Service throughout eastern China and in Singapore. |
* AWK went public in 2008, calculations use three-year rates (two for dividends -- one missed payment in 2011).
** SBS went public in 2002, calculations use nine-year rates (eight for dividends).
^NGG went public in 2005, calculations use six-year rates (five for dividends).
Source: Yahoo! Finance. (SBS dividend information available from BNY Mellon.)
If you'd parked your money in an index fund tracking the S&P 500 (INDEX: ^GSPC) a decade ago, you'd be far behind any of these utilities. Out of them all, Sabesp has really been the can't-lose utility pick of the past decade. Don't worry about the apparent lack of a dividend on Sabesp's CAPS page -- the company never stopped paying dividends.
Connecting the past with the future
Sabesp isn't the only long-term play on this list, though. If you want to mix in a power play, EIA predicts a 14% rise by 2035 in energy consumption among member nations of the Organization for Economic Co-operation and Development -- primarily North American and Western European countries, but also including Japan, South Korea, and Australia -- and it anticipates China and India leading Asian markets to a 118% increase in the same time frame. That's Huaneng Power's opportunity, which to me makes it a superior long-term play to utilities such as Southern and National Grid that operate in more mature markets.
Analysts expect 6% growth for Sabesp over the next 5five years, but I think that understates its regional potential. Sabesp now serves 23.7 million of the 41.3 million residents of Sao Paulo state in Brazil, but it can still expand throughout the nation and into other countries, and in many cases these will be less-developed areas. Operating in an area of heavier rainfall could also allow Sabesp to export water to drier territories in the future, but that's just a Foolish theory of mine.
Fool analyst Dan Dzombak picked out 10 top stocks -- including Sabesp -- earlier this year to capitalize on increasing worldwide water demand. It's a good source of "liquid" investment opportunities. For a more powerful play, you should check out this free report on the one stock best positioned to cash in on the world's energy needs.
