With most water delivery systems badly in need of repair or replacement, companies that supply the solutions figure to profit handsomely - making now a good time for investing in water stocks.
In the United States alone, estimates of water infrastructure needs run as high as $1 trillion.
Many of the pipes that carry water to U.S. residents are more than 60 years old, with some more than 100 years old. Water main breaks and sinkholes from leaking pipes are common in many U.S. cities.
Water infrastructure is in such bad shape that the nation's pipes leak 1.7 trillion gallons every year. The water lost in a single day is enough to supply the entire state of California.
Pressure to spend more money on the nation's water infrastructure is increasing. This week the National Association of Water Companies and U.S. Chamber of Commerce launched a campaign, "Water Is Your Business," to draw more attention to the problem.
And the public is already on board.
In a recent survey taken by water infrastructure company Xylem Inc. (NYSE: XYL), 88% of those polled said the government should be investing in water infrastructure, and 65% said they would accept slightly higher monthly water bills to pay for it.
With the need reaching a critical stage and pressure to act building, U.S. government spending to repair water infrastructure is bound to increase very soon and very rapidly, a golden opportunity for water stocks.
But the opportunity extends beyond the United States. The World Water Council says that current annual infrastructure spending of about $80 billion will double just within the next several years.
And rising global demand for water, driven by population growth, adds even more urgency to the problem.
The United Nations estimates that freshwater withdrawals have increased threefold over the past 50 years, as demand rises by 16.9 trillion gallons every year.
"A billion people lack access to clean water," Bank of America Merrill Lynch wrote in a recent research note explaining why it likes water ETFs. "Water is undergoing pressure both on the supply and demand side."
In the years to come, as governments around the world start spending the hundreds of billions of dollars needed to address these problems, money will flood into water stocks.
Investing in Water Stocks
Perhaps because water is among the most common of commodities, many don't even consider investing in water.
But the effort that goes into making water available to billions of people - storage, making it potable, getting it to users reliably - are all profit opportunities.
While some water stocks have become overbought over the past six months, here are five water stocks that should be good buys now:
- Xylem Inc. (NYSE: XYL): Water infrastructure accounts for half of Xylem's revenue. Spun off from ITT in 2011, the company has a truly global business, with almost two-thirds of its revenue coming from outside the U.S. XYL trades at about $27.85, with a one-year price target of $30. It pays a dividend of 40 cents a share for a yield of 1.50%.
- Danaher Corp (NYSE: DHR): Danaher makes water instrumentation and disinfection systems. While water is only part of Danaher's business, it's a big part of its environmental division, which accounts for about 23% of the company's profits. DHR trades at about $60, with a target price of $65.68. It pays a dividend of 10 cents a share for a yield of 0.20%.
- Northwest Pipe Co. (Nasdaq: NWPX): This small-cap stock ($219 million) is a bit riskier, but it is a pure water play, as the company makes large-scale pipes for drinking water systems. NWPX trades at about $23.39 and has a target price of $27.33. The stock pays no dividend.
- Veolia Environnement (NYSE ADR: VE): The Water Management division of this French-based company builds sanitation and water-saving solutions. The company is still being punished for being overleveraged in 2008. But as it works toward fixing that problem, VE's exposure to water is making it more attractive. The stock trades at about $12.84, which is above the $9.70 target price, but should bounce up eventually as the turnaround measures take effect. Meanwhile, investors can lap up the 75 cent dividend, good for a plump 6% yield.
- Valmont Industries (NYSE: VMI): VMI makes mechanized irrigation systems, but also builds towers for wind energy and cell phones - all growth industries. Earnings per share have risen 18% per year over the past five years. Valmont trades at about $147.31 a share and has a target price of $151.83. The stock pays a dividend of 90 cents a share, good for a yield of 0.6%.
Investing in Water ETFs
Investing in water need not be confined to stocks; there are several ETFs to choose from, including:
- PowerShares Global Water Portfolio (NYSEARCA: PIO): This ETF focuses on water treatment companies, but includes stocks in emerging markets as well as the U.S.
- PowerShares Water Resources (NYSEARCA: PHO): This fund is based on the Nasdaq OMX United States Water Index and covers many sides of investing in water.
- Guggenheim S&P Global Water Index (NYSEARCA: CGW): As its name suggests, this ETF tracks the Standard & Poor's Global Water Index.
- First Trust ISE Water Index Fund (NYSEARCA: FIW): This fund is based on an index made up of 36 stocks that derive a significant portion of their business from the potable and wastewater industries.
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