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Here’s why smart investors are diving into water shares

Image: Pennon. Fair use

Water companies have been very popular places for investors to stash their cash ever since the government privatised the industry back in 1989. In fact, our water utilities have proved to be such attractive investments that many have been completely taken over and are no longer publicly listed, with some now under foreign control.

Foreign ownership

Indeed, of the 10 regional water authorities in England and Wales, only three remain listed on the London Stock Exchange, with Thames Water, Yorkshire Water and Northumbria Water now under foreign ownership. So what is it about our precious water supply that proves to be so irresistible to overseas investment funds and foreign consortia?

First of all let me ask you this. If you were unhappy with your local water and wastewater services provider could you hop along to your favourite comparison website and switch to another supplier? Difficult. Perhaps you could switch to bottled water – although that might prove costly when taking a bath.

Monopoly

Water companies are essentially regulated regional monopolies and don’t face the same level of competitive pressures as your energy or broadband supplier. For this reason they’re regarded as very low risk and are ideal for providing balance and stability in a defensive portfolio. But for me the main attraction has to be the generous stable income they can provide.

The industry regulator Ofwat determines how much water companies can charge customers in exchange for services and further investment, with five-year regulatory settlements providing a steady stream of predictable inflation-linked income for investors. In these days of market volatility, neither Brexit nor Donald Trump can shake the regional water monopolies, and that has to be worth something.

Takeover rumours

Indeed, over the last few years, the remaining London-listed water firms have been subject to takeover rumours, and I for one wouldn’t be surprised if there weren’t ANY publicly-traded water companies left by the time the new President puts himself forward for re-election. Recent share price weakness in the sector means it could be a good time to tap into water shares. But which of the three remaining water utility firms should you choose?

Severn Trent (LSE: SVT) provides water services across the heart of the UK, as far north as Scunthorpe, and as far south as Gloucester. The share price of the Coventry-based FTSE 100 firm has pulled-back from all-time highs in September to near 12-month lows, raising the prospective dividend yield to 3.8% for the current year to March 2017.

Perhaps a more lucrative choice might be South West Water owner Pennon Group (LSE: PNN). The Exeter-based FTSE 250 firm also owns leading waste treatment and disposal business Viridor. The group’s shares are currently trading near 12-month lows and offer a superior dividend yield of 4.5%.

The winner

But my personal favourite would be the Warrington-based United Utilities Group (LSE: UU). The North West-focused utility giant is the largest of the three and in my opinion combines the defensive qualities of a large blue-chip utility with a generous inflation-beating dividend that current yields 4.3%, and rises to 4.5% for FY2018.

In all honesty, whichever water company happens to float your boat, I don’t think any of the three would be a bad choice of long-term investment. They’re all winners in my book.

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Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.