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Roger S. Conrad
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Roger Conrad needs no introduction to individual and professional investors, many of whom have profited from his decades of experience uncovering the best dividend-paying stocks for accumulating sustainable wealth. Roger Conrad founded and ran the Utility Forecaster and Canadian Edge newsletters... More
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Capitalist Times
  • Water Investing: Essential Stocks in Essential Services 0 comments
    Sep 12, 2011 9:42 AM | about stocks: WTR

    Americans’ demand for electricity and communications services rises every year. Water use, in contrast, has been flat to falling in most areas. But the investment opportunity is no less compelling, as the country spends hundreds of billions to deal with degraded supplies.

    The Environmental Protection Agency (EPA) estimates the US must spend at least $160 billion by 2020 to ensure safe drinking water supplies. That includes new pipelines and water mains to replace infrastructure built early in the last century as well as for treatment, storage and new sources. And that’s not including potential new treatment needs, such as for water used in hydraulic fracturing to produce natural gas.

    That large cities’ water systems are increasingly at risk is no great revelation to anyone who lives in one. The information in the table “Dirty States,” however, is a bit more surprising.

    In 10 states at least 15 percent of the population is served by systems that have violated at least one federal clean water law in the last 12 months. Five states have more than 20 percent of their population served by systems in violation: South Dakota, Missouri, Kansas, Oklahoma and Oregon.

    The good news is the world’s water problems can be solved with money. Every pollutant that enters the water supply can be filtered out. Industrial processes can be changed, for example removing mercury from power plant emissions before it enters the atmosphere. Even water shortages can be alleviated with today’s reverse osmosis technologies that convert seawater into drinkable supplies.

    The bad news is many water systems lack adequate funding. But therein lies the opportunity: Well-capitalized water utilities that make the needed investment and can earn a solid return--“spectacular” isn’t necessary--have a sure road to profit, almost no matter what happens to the economy or the rest of the stock market.

    As businesses, the US water utilities in my portfolio universally entered and exited the 2008-09 market crash/credit crunch/recession with barely a scratch. As stocks they didn’t wholly escape, but damage was light and quickly reversed.

    With fears of another recession running high, US water utilities are even better positioned on their fundamentals than in 2008. As a group, they have virtually no refinancing needs through the end of 2012. Payout ratios average well below 70 percent. Regulatory relations are strong, with only California a potential question mark for the future.

    Average yields still rank the lowest in the US utility universe. But the best are growing dividends robustly--ensuring more of the same reliable total returns that have paced the group over the past decade and more. Aqua America (NYSE: WTR), one of our top picks at Utility Forecaster, has returned nearly 11 times as much as the S&P 500 since mid-2001. And these stocks are far less volatile than almost any other equities. You can uncover why my growth spotlight is on Aqua America here.


    The result is a combination of superb safety, moderate but growing yields, low volatility and reliable long-term growth that’s tough to beat in these uncertain times. If you don’t already own a basket of well-capitalized water companies, now’s a great time to stock up. Check out this, this and this article for more top picks from the water services industry.

    Disclosure: I am long WTR.
    Stocks: WTR
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