By Lisa Springer
A commodity that soon may become more precious than gold or oil is, surprisingly enough, clean water.
It may sound far-fetched, but reliable sources such as the World Health Organization have been warning that the Earth is rapidly running out of clean drinking water. Today, more than a billion people worldwide lack access to clean water and, by 2050, it's estimated that more than 4 billion people (half of the Earth's projected population) will face severe water shortages. In the United States, the Southwestern states could be bracing for fresh water shortages even sooner -- by 2025, according to some estimates.
Water shortages are imminent because supply hasn't kept up with the growth of the world's population. In fact, by the end of the 20th Century, the world's population had tripled, while, fresh-water supply hasn't changed in more than a million years. And unlike fossil fuels that are somewhat interchangeable, there is no substitute for fresh water.
Fresh water demand is expected to rise more than 50% in emerging economies and by 15% in the developed countries during the next 15 years, according to The World Resources Institute.
This trend makes water stocks a must-own for long-term investors. So with that, here are four dividend stocks that will likely benefit from rising demand of fresh water.
1. Artesian Resources Corp. (Nasdaq: ARTNA)
Artesian provides water and wastewater treatment services to customers in Delaware, Maryland and Pennsylvania. The company owns the region's oldest and largest investor-owned water utility, which supplies more than 7.5 billion gallons of water each year to homes and businesses.
Artesian's revenue grew 6.5% in 2010 to $64.9 million. While earnings per share (EPS) grew 3% to $1.00 compared with the previous year, 2011 results weren't as exciting: Revenue was flat at $49 million in the first nine months of 2011, and EPS was $0.63, $0.20 lower than a year earlier. The cause: record rainfall from Hurricane Irene, which ironically cut customer water consumption. In December, however, Artesian purchased water systems serving high-growth areas in Maryland, a move analysts say will likely fuel earnings growth by 27% in 2012.
Artesian has paid dividends since 1931 and posted 14 consecutive years of dividend growth. In the past five years, the dividend has risen 4% a year on average. Cash flow totaling $18.9 million in the past 12 months easily covers $6 million in dividend payments, also leaving plenty of room for growth.
2. Consolidated Water Co. (Nasdaq: CWCO)
Consolidated Water operates seawater desalination plants in areas of the world where fresh water is scarce. The company owns water-treatment and distribution facilities in the Cayman Islands, Belize, the British Virgin Islands and the Bahamas. Consolidated was founded in 1973 as a private water utility in Grand Cayman.
Consolidated Water increased revenue by 6% in the first nine months of 2011 to $41.5 million from the same period a year earlier, but EPS fell a notch to $0.36 from $0.37 because of higher project-development expenses. The company has nearly $50 million of cash, which is way more than its total debt of just $14.6 million, in addition to good growth prospects tied to capacity expansion of its Bahamas facilities. Analysts target 19% earnings growth in 2012 and growth averaging 20% a year during the next five years.
Consolidated has paid dividends since 1996, but growth hasn't been consistent. The last increase was an 11% bump that took place two years ago. Despite this, I still think stronger earnings will lead to renewed dividend growth. Cash flow coverage of the dividend is already strong at four times annual payments.
3. California Water Service Group (NYSE: CWT)
California Water is the third largest investor-owned water utility in the United States, serving more than 2 million customers in four Western states. The company distributes water for consumer, business and irrigation uses, and offers related services such as wastewater treatment and water-quality testing.
The company's sales rose 12% to $399 million during the first nine months of 2011, compared with the year-ago period. EPS improved 9% to $0.86. Because of rising water demand, analysts predict annual earnings growth will accelerate from 8% in the past five years to 12% in the next five years.
California Water has paid dividends for 67 years and raised dividends 44 years in a row. The last hike was 3.4% in January 2011, so I think an increase is likely to happen later this month. Cash-flow coverage of the dividend is nearly four times payments, which creates a cushion for more dividend growth.
4. Middlesex Water Co. (Nasdaq: MSEX)
Founded in 1897, Middlesex provides regulated and non-regulated water, wastewater utility and related services to business and residential customers in New Jersey and Delaware.
Due to the effects of Hurricane Irene, Middlesex's revenue growth was just 1% in the first nine months of 2011. EPS fell 10% to $0.72 from a year earlier, due to a stock sale that increased the share count. Things could change later this year, when Middlesex is expected to generate 14% earnings growth as a result of recent acquisitions and infrastructure investments that will greatly expand its footprint.
Middlesex raised the annual dividend by one cent in November 2011 to $0.74, marking 39 years in a row of dividend increases and 99 years of dividend payments. Dividend payout from cash flow is a conservative 42%.
Risks to Consider: Artesian, California Water and Middlesex operate as regulated water utilities, which means rate hikes must be approved by the municipalities they serve. Constraints on their ability to raise prices limit the long-term growth rates for these utilities.
My top picks: for aggressive investors, Consolidated Water, which serves off-shore markets where fresh water shortages are most acute.
Conservative investors should look into California Water, which has a superior record for dividend growth and a strong presence in Western states, where water shortages are likely to occur before other states. Artesian and Middlesex are relatively safer investments poised for earnings gains and higher dividends in 2012. All four of these stocks can provide investors with nice dividend yields.
Disclosure: Neither Lisa Springer nor StreetAuthority, LLC hold positions in any securities mentioned in this article.