Although water is critical to life, investors need to understand that companies in this industry aren't a "sure thing." The biggest reason for this is that when, and if, water becomes scarce, municipalities will step in to take over (nationalize) what should otherwise be sold at the most profitable price (thereby curbing wasteful consumption.) There is literally an upside cap on profitability to companies like these due to the critical importance of the resource being sold.
Water utilities were on the move yesterday as Los Angeles-based Dividend Achiever Southwest Water Company (SWWC) announced that it was being bought by Water Asset Management, LLC in a deal valued at $427 million. The stock of Southwest Water Company (SWWC) jumped 46% during market hours on the news. Almost all other water utility companies moved higher, as seen in the table below.
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It should be noted that of the ten companies listed above, San Jose Water (NYSE:SJW), American States Water (NYSE:AWR), California Water Service (NYSE:CWT), AquaAmerica (NYSE:WTR), American Water Works (NYSE:AWK) and Consolidated Water (NASDAQ:CWCO) are Dividend Achievers. In the last month, San Jose Water (SJW), California Water (CWT), AquaAmerica (WTR) and American States Water (AWR) have been on our Dividend Achiever Watch List at the same time. The New Low Observer had issued Investment Observations on AquaAmerica (WTR) on October 31, 2009, and the other on California Water Service (CWT) on January 3rd.
As a general observation of our Dividend Achiever Watch List and our Nasdaq 100 Watch List, when companies from an industry start to cluster on the list we know that whatever cyclical forces are at play require us to look closely at that industry and those companies. Although we have sold our initial investment in AquaAmerica (WTR), we subsequently acquired a "substantial" position in California Water Service (CWT).
Anyone interested in the qualitative elements of water utilities should be mindful of our boiler plate warning on investments in the industry:
Disclosure: Author long CWT