Dividend Investing in the Next Hot Sector: Water Utilities
Published Thu, 19 June 2012 12:00 CET by DividendYields.orgToday, the global water industry is a $450 billion business. Consisting of the companies operating water and wastewater networks, the global water industry accounts for up to 2% of gross domestic product (GDP). This share stands ready to rise as the surging water demand in the future and the need to upgrade and replace the existing infrastructure boost consumption and investments in the sector and thus the sector's contribution to GDP.
From whatever perspective this market is analyzed, it may be concluded that the water industry looks poised for growth. Out of nearly 70% of all water present on the planet, only 1% is drinking freshwater available for human consumption. As the world's population is growing by about 80 million people each year, the United Nations Educational, Scientific, and Cultural Organization (UNESCO) concludes in its United Nations World Water Development Report 3, that “freshwater withdrawals have tripled over the last 50 years, and that demand for freshwater is increasing by 64 billion cubic meters a year (1 cubic meter = 1,000 liters).” Moreover, Citibank estimates that 70% of the world's population will live in urban areas by 2050, which will increase the water demand fivefold from the present levels. Especially strong growth will be in the emerging markets. Given the scarcity of drinking water, the United Nations estimates that two thirds of the world population will be “water-stressed” by 2025.
OECD Global water demand: Baseline scenario, 2000 and 2050
Source: OECD Environmental Outlook Baseline
While the statistics point to a robust demand for scarce water in the future, some go as far as to suggest that water is the new oil in the commodity world. The best way to capitalize on the water market's potential is to invest in the securities of global water utilities. Even better, investors can tap the water market's expected growth by investing in water utilities that pay attractive and sustainable dividends. Total returns are encouraging: water utilities as a group have outperformed other industry groups over the past 25 years. Here is a quick glance at several global water utilities that currently offer attractive yields, with a potential for future capital appreciation:
Veolia Environnement SA (PAR: VIE)(NYSE: VE) is a France-based $5.7 billion company that provides environmental management services. It offers water and wastewater services, operating large drinking water plants, wastewater decontamination and recycling plants, drinking water distribution networks, and wastewater collection networks. It also builds water infrastructure. The company pays a dividend yield of 6.8% on a payout ratio of 41% of 2011 free cash flow. The stock is trading on a forward P/E of 9x, well below the company's historical ratios. Shares are changing hands at $11.4, down 54% over the past year.
Suez Environnement Company SA (PAR: SEV)(OTC: SZEVY, SZEVF) is a $4.4 billion, France-based holding company providing environmental management services. It provides water and waste management services, including drinking water and wastewater treatment services, water treatment engineering, waste collection, recovery and disposal activities. The company is active internationally. The stock pays a dividend yield of 7.5%. It has a forward P/E that is below the stock's historical ratios. The shares are down 33% over the past 12 months.
United Utilities (LSE: UU)(OTC: UUGRY) is a $7.5 billion water and wastewater company, operating a network in the North West of England through a subsidiary United Utilities Water PLC (UUW). It supplies daily some 2,000 million liters of water to 3.2 million homes and businesses. The stock pays a dividend yield of 4.6% and is up 20% over the past year. The stock has a forward P/E that is below the company's five-year average ratio.
Severn Trent (LSE: SVT)(Nasdaq: STRN) is a $1.2 billion UK-based company that supplies and treats water and wastewater domestically and internationally. It operates through Severn Trent Water and Severn Trent Services. The former provides water and sewerage services to 3.2 million households and businesses in the Midlands and mid-Wales, while Severn Trent Services supplies water and wastewater operational and treatment solutions. The stock pays a dividend yield of 4.1% and is up 20.5% over the past 12 months.
Artesian Resources Corporation (Nasdaq: ARTNA) is a $183 million supplier of water, wastewater, and engineering services on the Delmarva Peninsula. The company is headquartered in Newark, Delaware (USA) and serving about 78,600 metered water customers. The company pays a dividend yield of 3.7% on a payout ratio of 80%. The stock has a forward P/E of 19.4x, and is trading at a premium to the water industry in the United States. The shares are up 14.4% over the past year.
Consolidated Water (Nasdaq: CWCO) is a $124 million operator of seawater desalination plants and water distribution systems. The stock pays a dividend yield of 3.5% on a payout ratio of 68%. It has a forward P/E on par with the water industry. The stock is down 5% over the past year.
California Water Service Group (NYSE: CWT) is a $787 million regulated and un-regulated water utility company. It serves 2 million customers in California, Washington, New Mexico, and Hawaii. The stock pays a dividend yield of 3.4% on a payout ratio of 73%. On a forward P/E basis, the stock is selling at a premium to the industry. Shares are flat on the year.
Connecticut Water Services (Nasdaq: CTWS) is a $273 million regulated water utility serving some 90,023 customers in 55 towns in Connecticut, USA. The stock pays a dividend yield of 3.1% on a payout ratio of 76%. The shares are trading at a major premium to the U.S. water industry. The stock is up 21% over the past 12 months.
American Water Works Company (NYSE: AWK) is a $6.3 billion water and wastewater services company. It serves 15 million people in approximately 30 U.S. states and 2 Canadian provinces. The stock pays a dividend yield of 2.8% on a payout ratio of 54%. The stock is up 23.5% over the past 12 months.
American States Water Company (NYSE: AWR) is a $771 million company providing water, electric power, and contracted services in the U.S. It serves 255,935 water customers and 23,508 electric customers in California. The stock's dividend is yielding 2.7% on a payout ratio of 44%. The shares are trading at a forward P/E that is well above the water industry average. The stock is up 18.2% over the past year.
Aqua America (NYSE: WTR) is a $3.7 billion regulated water and wastewater services company. The company's customers are located in Pennsylvania, Texas, North Carolina, Ohio, Illinois, New Jersey, New York, Florida, Indiana, Virginia, Maine, and Georgia. The stock yields 2.5% on a payout ratio of 61%. On a forward P/E basis, it is trading at a major premium to the U.S. water industry. The shares are up 22% over the past year.
York Water Co. (Nasdaq: YORW) is a $235 million drinking water distributor. It serves 187,000 customers in 39 municipalities in York County and 7 municipalities in Adams County of Pennsylvania. The company pays a dividend yield of 3.0% on a payout ratio of 76%. The stock is trading at a major premium to the U.S. water industry. The shares are up 6.0% over the past 12 months.
Thai Tap Water (SET: TTW)(OTC: TTWSF) is a Thailand-based company producing and distributing tap water in five districts in Nakhon Pathom and Samut Sakhon Provinces. The Company has a production site in Bang Len District with a total production capacity of 440,000 cubic meters per day. The stock pays a dividend yield of 5.8% and is up 23% over the past year. Based on the current P/E, the stock is priced below its industry.
Woongjin Coway (KSE: A021240) is a South Korean company providing water purifiers. It pays a dividend yield of 3.1% and is down 16.4% over the past year.
Manila Water (PHS: MWC)(OTC: MWTCY) is a Philippines-based company providing water, sewerage, and sanitation services to six million inhabitants of the East Zone, encompassing 23 cities and municipalities, including parts of the Metro Manila. The stock pays a dividend yield of 2.3% and is up 30.3% over the past year.
Inversiones Aguas Metropolitanas AS (SGO: IAM)(OTC: IAMTY) is a $1.6 billion Chilean drinking water distributor and sewage water manager. It pays a dividend yield of 4.4%. The stock is up 20.6% over the past 12 months.
|Stock name||Dividend Yield|
|United Utilities Group||4.14|
|Connecticut Water Service||1.87|
|American Water Works||1.66|
|California Water Service Group||1.49|
|American States Water||1.37|