As much as we love our smartphones they are unnecessary for survival. On the other hand, we cannot do without water. Plus, as the world population continues to grow, so too will water consumption. Looking at these facts from an investment point of view, there must be a good way to take advantage as an investor. Let's take a look at investment options to attack this low-risk industry which benefits from an excellent economic moat and will continue to grow along with world population.
Production and distribution
Water utilities typically appeal to conservative investors because their rates are regulated, their earnings drivers are straightforward, their dividends are steady, and their product is both essential and irreplaceable -- thus the great economic moat. Unfortunately, these companies are not going to have great growth, because the government forces them to keep rates down. It is important to note that in tough economic times, when state budgets are under pressure, the tax component of utility bills may rise, which could limit the profitability of a utility if it can't implement an offsetting rate increase.
Water is consumed through irrigation (70%), farming and industrial (22%), and domestic use (8%). Aqua America (NYSE: WTR) embraces all of these. It owns a group of utilities that serve about 3 million customers in 13 states. This stock yields 2.35%, and the company has grown steadily over the last five years, at an average of 8% annually.
Another solid dividend-paying stock is the smaller, $1 billion market cap California Water Service Group (NYSE: CWT). Its dividend has been stable since 1990 and currently yields 3%. California Water Service Group is the third largest investor-owned water utility in the United States. Even though California Water Service still has to compete with some government-owned entities, I enjoy the investor-owned appeal, which lets it set its own rates. Being in control of pricing power is a powerful tool; having someone else tell you what to charge is not.
According to the Environmental Protection Agency, the U.S. water infrastructure needs nearly $400 billion over the next two decades to ensure safe drinking water for all Americans. That means a lot of business and big growth potential for Northwest Pipe (NASDAQ: NWPX), which supplies large-diameter, high-pressure steel pipeline systems for use in water infrastructure applications. Already emergency drought-related work and expected infrastructure projects in Texas are expected to increase in 2014 and beyond.
Northwest Pipe provides the supplies for companies that need to deliver water to their customers. The process is impossible without them. Northwest Pipe is attractive with its continued growth and low debt. Unlike many other water companies, it does not pay a dividend, and that is because it is committing most of its cash to continuing growth. Northwest Pipe also has strong relationships with public water agencies, contractors and engineering firms -- which leads to easier accommodations in the developmental process of projects prior to bidding.
Even though Northwest Pipe is right next to its 52-week high, it only has a P/E of 15, a big surprise for a company with its growth potential. The big spending necessary to maintain the infrastructure that delivers the vital resource of water will help Northwest Pipe continue growing profits and its share price for years to come.
PowerShares Water Resources ETF (NYSEMKT: PHO) is based on the NASDAQ OMX US Water Index. Basically, it invests 90% of its total assets in companies that create products designed to conserve and purify water for home, businesses, and industries in the Untied States. If you are interested in the global scale, PowerShares Global Water ETF (NYSEMKT: PIO) has some diversity. Top allocations include the U.S. 47.3%, U.K. 16.1%, France 12.4%, Brazil 7.1%, China 4.6%, and Japan 4.4%.
According to The World Water Organization, with persistent regional droughts, shifts of the growing population to urban coastal cities, and the water needed for industrial growth, it is projected that by the year 2025 water demand will exceed supply by 56%! These ETFs provide an opportunity to diversify into many different areas and companies, protecting investors from the risk of investing in a company that focuses on delivering water to one geographic area.
Whichever angle you choose, water utilities are a steady addition to any portfolio. If you're looking to make some quick money, these stocks obviously are not going to do that, but they will give you a steady return over time and help your portfolio stay in the green. Paychecks don't always allow you to upgrade your phone, but everyone finds a way to pay for water.
Grant Hosticka has no position in any stocks mentioned. The Motley Fool recommends Aqua America and California Water Service Group. 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.