Week 153 - Water Utilities

Situation: You know that water is the major component of food, and essential to life. But it is also a main ingredient for a lengthening list of modern-day wonders such as hydraulic fracturing (“fracking”), server farms, and extracting oil from tar sands. The price for a liter of water is rising faster than the price for a gallon of gasoline. Cities in the southwest US, where a drought is entering its 5th decade, struggle to provide enough drinking water to growing numbers of residents. Wichita Falls, Texas, has resorted to recycling toilet water; San Diego, CA, has resorted to recycling sea water. Water utilities produce an essential good that inflates faster than the Consumer Price Index. Other sub-industries sharing that distinction are food processing (see Week 152) and healthcare (see next week’s blog).

Farmers in the US have managed to sidestep the crisis by digging ever deeper wells and more of them to supply water to center-pivot irrigation systems. Those meter out groundwater to rotating sprinklers, which cuts water usage 40% compared to “flood irrigation” based on canals. But aquifers are being depleted, especially in Texas and California where farm production is in long-term decline.

For this week’s Table, we examine water utilities among the Dividend Achievers. Those utilities have increased dividends annually for the past 10 or more years but there are only 4 that make our list. So, we have had to cast a wider net--looking for future Dividend Achievers--and found a winner. American Water Works (AWK) has increased its dividend annually since the stock was listed in August of 2008. Along with Aqua America (WTR), AWK supplies water for “fracking” the Marcellus Shale, which extends from West Virginia up through Pennsylvania and eastern Ohio to southern New York State. For both companies, that is the fastest-growing part of their business.

Bottom Line: You’ll want to think hard about investing in a water utility. Why? Because the stock will hold its value during a recession but also reflect earnings outperformance during an expansion.

Risk Rating: 3.

Full Disclosure: I have stock in AWK.


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