Roughly 97% of the water on this planet can't be used as drinking water. Of the 3% that can, about half is locked in polar ice. That leaves a paltry 1% or so of the world's water for more than 7 billion people (and counting) to share. That's why water is poised to become a contentious resource and one that savvy investors could learn to love.
The essence of life
Without water you'll die in about three days. In the United States, blessed with ample fresh water, that's an almost ridiculous statistic. However, the severe California drought really brings home the fact that access to water shouldn't be taken lightly. And in some countries, acquiring drinkable water is a daily chore -- not a matter of turning the kitchen tap.
Nobody really owns water, per se, so you can't invest directly in this life-giving resource. However, you can invest in the companies that transport it in developed markets: water utilities. U.S. examples include American Water Works Company (NYSE:AWK) and Aqua America (NYSE:WTR). Internationally a company like Veolia Environnement VE SA (OTC:VEOEY) is an example, though foreign players like this are often involved in more than just water. Drinking water is a little under half Veolia's business.
These companies own and operate the infrastructure that brings water into our homes. That's a pretty stable business based on long-lived assets. However, many of the pipes we rely on are getting long in the tooth, some are more than 100 years old, leading the American Society of Civil Engineers to give the U.S. water system a less-than-impressive grade of D.
But that's a growth opportunity for water utilities, since they get to pass on the costs of system upgrades to customers -- bolstering their earnings and investors' returns. American Water, for example, has plans to spend over $5 billion on its systems between 2014 and 2018, which it expects to support as much as half of its earnings growth over that span.
Fixing pipes, however, isn't the only way to grow earnings in the space, there's also acquisitions. On that front, cash strapped municipalities that own their own water systems are a prime target. By selling such systems to water utilities like Aqua America, local governments get cash and reliable partners. Aqua America alone has consummated nearly 200 acquisitions over the past decade. Over that span revenues increased in all but one year and dividends were hiked every year.
Slow and steady and ...
This mixture of built-in growth and acquisition expansion hasn't gone unnoticed on Wall Street. Slow and steady water companies tend to have relatively low dividend yields by utility standards. Both American Water and Aqua have yields around 2.5%. Veolia yields more, at nearly 6%, but it has a much broader focus and, thus, isn't a pure play. And Veolia is still trying to clean house after an expansion binge that left it over weighted with debt. In other words, just because a company is in water doesn't mean it's a safe bet.
These aren't the only options in the water space, however. For example, Consolidated Water Company (NASDAQ:CWCO) operates salt water desalination plants. It's main focus is the Caribbean, but it has construction plans in Asia and on the U.S. border in Mexico. Both of which could provide access to potentially large new markets for Consolidated. It's expensive to make salt water potable, but areas without access to fresh water sources are happy to pay up for such services. And the drought in California, a stone's throw from Consolidated's proposed Mexican plant, shows that even developed markets aren't immune from water shortages.
You can also sidestep water utilities by investing in the companies that help rebuild old pipes. Aegion Corp (NASDAQ:AEGN) is a good example. This engineering and construction company makes its money by "protecting pipelines." About 40% of its revenues are from project work, with the rest coming from maintenance business, which is recurring in nature. Although the company's oil and gas business is expected to be the big growth driver going forward, Aegion's water and waste water business is expected to grow a steady 3% to 5% over the next three years. And with a grade of D, the U.S. water system alone will provide years of business for this internationally diversified pipeline specialist (the United States accounts for roughly 80% of the top line).
You can't live without it
While it's hard to invest directly in water, water utilities, water technology companies (desalination), and water construction companies all offer investors a way to participate. With a growing world population and limited drinking water supplies, this sector could quickly become an important area to watch and is worth looking into for prospective investors.