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Why Water Stocks Are About to Get $1 Trillion Boost

By , Money Morning •

The American Society of Civil Engineers has just released its annual Report Card for America's Infrastructure, which grades several critical areas: water and environment, transportation, public facilities, and energy.

And that report card is nothing we'd like to take home to Mom and Dad, moving as it has from a D to a D+ over the last four years. In short, there remains a lot of room for improvement.

The Report Card suggests that the United States government will have to spend roughly $3.6 trillion on infrastructure building to get to a passing grade - at least above a "gentleman's C."

According to the American Water Works Association, nearly one-third of that sum - $1 trillion - will need to be spent on that most indispensable resource: water, and that makes for plenty of investment opportunities in water stocks.

Although ASCE found that American drinking water quality is universally high, with few outbreaks of waterborne disease, the mechanism for getting that water to consumers is increasingly under strain.

Why Water Systems are a Mess

ASCE gave drinking water infrastructure a D grade. The pipes and main lines that supply water to America's largest cities are approaching 100 years old and are failing with alarming regularity.

These failures disrupt traffic, interrupt commerce, and ruin streets, to say nothing of the interruption of water service to large numbers of people.

It's not just the cities that are feeling the pressure of crumbling water infrastructure. Rural areas may have it even worse when it comes to availability of water to drink and use for agriculture.

The infrastructure situation is grim, but there's significant potential upside to solving the problem, setting aside for a moment the fact that we all need water to live.

That $1 trillion is likely to come from a combination of government and private sector spending, and that means there's money to be made in water stocks.

The people making the money will be those grabbing the contracts, helming these projects, and their investors. The impact across potable water infrastructure, industry, and agriculture will be profound.

Investing in Water Stocks

The United Nations says that the first "real" pangs of any American water crisis are still decades off. But plenty of companies have had the foresight to get in before matters reach a crisis level. They're growing - and posting revenues - now.

There are many different ways to invest in water stocks, from direct investment to ADRs to baskets like ETFs.

Here are a few choice picks that will benefit from an unstoppable trend.

  • If you feel that broad exposure to a variety of water stocks would suit you, you might consider PowerShares Global Water Portfolio ETF (NYSE: PIO). A veritable one-stop shop for water companies and utilities, this ETF tracks a wide basket of stocks. Shares of PIO are up better than 11% for the year, and yielding a modest 1.26% - still better than Treasuries. The ETF is all the more compelling because of its exposure to foreign markets like Brazil and Southeast Asia, where growth is strong.
  • Xylem Inc. (NYSE: XYL) was spun off from manufacturing titan ITT Corp. (NYSE: ITT) in 2011. Xylem does about two-thirds of its business outside the United States, and it is a major water infrastructure player around the world - wherever water projects are being undertaken. The stock is now testing 52-week highs and yields 1.66%.
  • The utility Aqua America Inc. (NYSE: WTR) is a holding company for a group of utilities. Together, they serve about 3 million customers in 13 states. This stock yields 2.35%, and the company has grown steadily over the last five years, an average of 8% annually.
  • Another global play is Companhia de Saneamento Basico do Estado Sau Paulo (NYSE: SBS). This Brazilian giant provides water and sanitation to nearly 24 million people in the South American powerhouse. SBS is wired into a market that will do nothing but grow in the coming years. The best part? It yields close to 9%.

The problem is clear, inasmuch as we've acknowledged a problem exists. The way forward is clear, if we can muster the political will to spend $1 trillion on something that isn't jet-powered, and doesn't hurl bullets and missiles or have better than 56,000 rushing yards.

There is a good supply of political will behind fixing water infrastructure. According to a poll by Xylem, 88% of respondents said the government should be investing in water infrastructure upgrades, and 66% of respondents said they would accept a slightly higher water bill to pay for it.

As Benjamin Franklin reminded us, "When the well is dry, we will know the worth of water."

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