Thirsty For Blue Gold?

11/12/2012


Is the U.S. running out of fresh water?

This provocative question is hotly debated by sharp minds and sharper tongues. We at the Forecasts will stay out of the fight, instead providing readers with some facts neither side can dispute.

• In 2005, the last year for which the U.S. Geological Survey released statistics, America used about 349 billion gallons of fresh water per day, roughly flat with 2000 and down 4% from the peak in 1980. While the population has risen, a combination of conservation, regulation, and new technology has contributed to lower per-capita water use. Our take: Per-capita water usage will probably continue to fall, limiting revenue- and profit-growth potential for water utilities.

• The Environmental Protection Agency says U.S. water systems lose about 14% of the water they treat to leaks, and some systems lose more than 60%. To cope with leaks and other problems caused by aging infrastructure, the EPA estimates U.S. water systems must invest $335 billion from 2007 through 2015. Our take: Water utilities will deploy much of their cash flows in capital projects, which leaves less for dividend hikes.

• Water utilities don't usually own the water they use, which remains a public resource. However, they generally own the pipes, pumps, and tanks. Our take: There is no substitute for water, and utilities will continue to play a crucial role in its distribution.

While municipalities nationwide are increasingly selling off their water assets in an effort to raise cash, about 84% of the country's water systems are owned by municipalities or other governments. Water utilities account for less than 3% of the stock-market value and less than 1% of the revenue of the broader utility sector. Our Quadrix® research universe contains just 13 water utility stocks, and only five have stock-market valuations above $300 million; the industry is too small for pure-play mutual funds. See www.DowTheory.com/Go/Water for a list of the 13 water utilities.

Investors can find a few water-focused mutual funds that follow the S&P Global Water Index and similar indexes. See the table below for a list. But these funds aren't pure plays. Only 15 of the 50 stocks in the S&P Global Water Index are utilities (less than half in the U.S.), and the fund invests the bulk of its assets in industrial companies focusing on infrastructure and equipment.

WATER-RELATED MUTUAL FUNDS
Total Return
Weighted
Average
Quadrix
Overall
Score
Fund (Price; Ticker)
Div.
Yield
($)
12
Mos.
(%)
3 Yrs.
(Ann.)
(%)
Exp.
Ratio
(%)
Category
Exchange-traded funds
PowerShares Wtr. Res.
($20; PHO)
0.8
16.6
7.8
0.62
59
Industrials
PowerShares Global Wtr.
($17; PIO)
2.0
4.2
0.8
0.75
NA
Industrials
Guggenheim S&P Glob. Wtr.
($22; CGW)
1.9
10.6
8.7
0.70
NA
Industrials
First Trust ISE Wtr. Index
($25; FIW)
1.1
18.8
12.5
0.60
58
Industrials
Open-end funds
Allianz RCM Global Wtr.
($10; AWTDX)
0.4
16.3
8.8
1.60
NA
Nat'l Res.
Calvert Global Water
($16; CFWYX)
0.2
16.3
7.4
1.60
NA
Nat'l Res.

If you want exposure to water utilities, your best option is buying individual utility stocks. And with a couple of exceptions, we don't like that idea.

Water utilities average Quadrix Overall scores of 46, not impressive versus the market though high relative to most other utilities. On average, water utilities have higher price/earnings ratios (20) than the average utility (17), and only two of the seven in our Utility Update earn A (above average) ratings.

While our buy lists contain no utilities, investors interested in the sector should consider our Top 15 Utilities portfolio (www.DowTheory.com/Go/Top15). And investors seeking water exposure should check out American States Water ($45; AWR), the portfolio's only water utility. Also fairly attractive is SJW ($25; SJW), which earns an A rating but looks a bit too pricey to make the Top 15 Utilities portfolio.

We are making a change to the Top 15 Utilities portfolio this week — Cleco ($42; CNL) is out and Idacorp ($44; IDA) is in. For more on the move, turn to Portfolio Review.


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