Consolidated Water: A Specialized Utility Priced Under Book With A Healthy Yield

| About: Consolidated Water (CWCO)

Slaking the Global Thirst

Consolidated Water (NASDAQ:CWCO) operates water desalination plants in the Caribbean and provides water for drinking, irrigation, sewage in addition to contracting individuals to operate such plants. The business is very simple to understand: Often times on densely populated islands, the population demand exceeds the natural supply of fresh water. Despite the fact that it is energy intensive and costly, there are several areas where it makes sense to conduct desalination operations. It's a small niche, but one that most certainly exists and has the potential to grow in the coming years as the world becomes more densely populated.

Consolidated Water is a small company, with a current market cap just north of $120 Million, trading at a P/E of 18.84. The company has $9 of book value per share, and $2.74 of cash per share against a current price of $8.4 and pays dividend yielding 3.5% at the current price.

I purchased my shares when the company's price gave it a yield a little over four percent, and will continue to hold it for several reasons.

  1. The stability of the current business. Despite the fact that one of the plants was nationalized by the government of the British Virgin Islands, its subsequent victory in a lawsuit last year provided a successful judgment and legal established precedent, providing shareholders a degree of safety.
  2. Low debt and a large amount of cash - The company currently has more than five times the amount of cash on hand available than debt obligations, indicating that its commitments can be quickly satisfied. The cash can also be used to finance expansion, or even share buybacks.
  3. Insider ownership over 10% - A good amount, not extremely high but high enough to indicate that the management has a stake in the constant improvement of the company.
  4. A gradual increase in dividends - Over the past decade, CWCO has raised its dividend from 5.25 cents per quarter in 2003 to 7.5 cents per quarter in 2012. An increasing trickle that suffered no reduction during the 2008-2009 financial crisis, something I look for as a test of strength when I make any investment for dividend income.

Expansion Possibilities and the Long Term

CWCO has explored expansion into two separate geographic regions outside of the Caribbean. The first venue for expansion is a desalination project in northern Mexico currently in its early phases. The plant will is in close proximity to the border with the United States, with the goal of importing water into Southern California. There are numerous regulatory and environmental hurdles to clear in this project, so I would advocate, at most, a guarded optimism. Despite the considerable interest in the plant given its size and the insatiable demand from Southern California for fresh water, I believe the second area of new business can furnish equally promising possibilities over the next decade: South Asia.

CWCO's expansion into Bali with a plant designed to meet the needs of an island resort is very interesting. Indonesia is a logical area to expand for the company, as it is able to transpose its business experience in the Caribbean quite easily. Indonesia has an enormous number of islands, a growing population, high economic growth and numerous tourist centers. If CWCO is able to establish a foothold with the desalination solution in Indonesia, the possibilities of expansion are considerable and reasonable given the geographic similarity to the Caribbean. If its project in Bali does well, I will be very optimistic about this regional driver of future growth.

Risks Affecting Profitability

  1. Despite winning a judgment from the government of the British Virgin Islands, nationalization of desal plants remains a threat and is still possible given the essential nature of the utility to the water-security of small island nations.
  2. Rainfall - This is a two-way street. In years with less than average rainfall, CWCO will see increased profitability. In wet years, there will be less need for its product.
  3. Natural disasters can strike the Caribbean with a large amount of force, including hurricanes and earthquakes, damaging or destroying CWCO's plants.
  4. Expansion into Mexico/Southern California is uncertain - I would be very careful about relying on CWCO's Mexican expansion plans to drive growth as there are a lot of problems facing the project at this time.

I am going to continue to hold CWCO for the long term for its dividend, growth prospects in South Asia and because I believe water will be an extremely important resource in the coming decades.

Disclosure: I am long CWCO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.