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Thirsty for a new investment? Look to water

Gillian Bernard
Wednesday, August 15, 2012

"Water, water everywhere but not a drop to drink." — Samuel Taylor Coleridge

Over 70 per cent of the Earth's surface is covered by water. However, of this vast amount only three per cent is fresh or drinkable water. Furthermore, almost three quarters of that three per cent is in the form of glaciers.

The Population Institute says global demand for fresh water already exceeds supply by 17 per cent. Due to climate changes, pollution and waste, the supply for this precious resource, required by the world's seven billion (and growing) people, is becoming an imperative and lucrative business. At least 80 countries are already suffering from water shortages, and the United Nations estimates that 67 per cent of the world population will be "water-stressed" by 2025.

Water is essential to life. It's required for sanitation, drinking and irrigation to name a few uses. According to the American Water Works Association the average US daily household water consumption (including outdoors) is 350 gallons. Worldwide, agriculture accounts for 70 per cent of all water consumption, compared to 20 per cent for industry and 10 per cent for domestic use. With population growth on the rise and increasing urbanisation, the demand for water has in fact, increased at more than twice the rate of population growth in the last century. The question is how to capitalise on this growing trend. Similar to any other tradable commodity, investors can gain exposure by buying shares in companies involved in the various stages of the harvesting, storage and distribution of this "blue gold".

The American Water Works Company is a water and wastewater utility company which provides drinking water, wastewater resources and other water related services to an estimated 15 million people in more than 30 states and in two Canadian provinces. Amidst severe drought conditions plaguing the Southern region of the US, including parts of Texas, the company's share price has soared 18.52 per cent year to date. The company has experienced steady earnings growth over the past three years with current Earnings per Share of US$2.01 and Price to Earnings ratio of 18.91. At the current price of US$37.79 per share, it also offers an attractive dividend return of 2.63 per cent (all values as at August 14, 2012).

While the obvious route may be to invest in the companies that deal in the actual filtration or treatment of water, one may also consider companies that construct or own the pipelines or infrastructure which facilitate the distribution of this valuable liquid. An example of such is Flowserve Corporation. It is a company with over 200 years experience and they specialize in the development and the manufacture of flow control equipment integral to the movement, control and protection of the flow of materials worldwide. Its share price has appreciated 28.51 per cent year-to-date.

Even though the US is experiencing one of its worst droughts in recent history, the need for water and lack of supply is not specific to the United States. Companhia de Saneamento Basico, Brazil's largest water company serving 22.7 million people, has seen also seen a year-to-date increase in share price of over 59 per cent. Brazil, one of the world's leading emerging markets, has just over a 50 per cent stake in the company. The company is responsible for providing water via about 6.6 million connections and offers sewage services through about 4.8 million connections. It also has more than 400 treatment plants. The company is currently trading at US$ 88.62 per share and has a Price to Earnings ratio of 13.31. This company also offers a dividend yield of 2.78 per cent (as at August 14, 2012).

If you prefer to diversify your exposure and invest in several companies that deal in this commodity, you may consider an Exchange Traded Fund (ETF). The PowerShares Global Water Portfolio's objective is to achieve investment results corresponding to price and yield performance of the Palisades Global Water IndexTM (Equity Index). As such, it allocates almost 30 per cent of its funds in US corporations while the balance is invested in regions such as Japan, Canada and developed Europe. The fund's top holdings include Flowserve Corporation (8.55 per cent), as well as France-based utility Company, Veolia Environnement SA (8.5 per cent) and has generated 7.44 per cent in returns year to date.

Water shortage issues are not a recent development, however unlike oil, there is no substitute for water. This coupled with the fact that water is a necessity for our existence, ensures the demand for this commodity, and consequently water solutions, will continue to rise in the years to come.

Gillian Bernard is a Wealth Advisor at Stocks and Securities Limited and can be contacted via gbernard@sslinvest.com

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