Buy Water Now!

My daughter asked me the other day whether it will rain over the half-term holidays. I told her that I had absolutely no idea, but it's quite possible we may have the wettest drought on record. Poor kid! She is now going to grow up believing that a drought means a torrential downpour!

Thing is, she isn't the only person who is baffled by water company claims that Britain is suffering from a severe water shortage. Some people believe that it is a conspiracy by utility companies to foist water meters onto every household. That way, we will all have to account for every drop of water we use. Amusingly, one politician has already been charmed by the water companies' arguments, and proudly boasts that he doesn't flush his toilet until it is absolutely necessary. Euw!

In reality, water is a commodity in the same way that gold, silver, zinc and iron are commodities. But what makes water even more exceptional is that it is largely unaffected by economic cycles. In other words, we need clean, drinkable water all the time, and demand for the wet stuff is increasing. Additionally, there are no known substitutes, and to me that makes water companies a good long-term bet.

Today Kelda (LSE: KEL) showed why water companies are such robust businesses. The owner of Yorkshire Water said annual profits rose 16% as turnover improved 15%. It has also lifted its dividend 5%, and its shares currently yield 4.1%. United Utilities (LSE: UU.) will announce annual figures next week, and the diversified utility companies is expected to post a 20% rise in profits. With a dividend of 43.6p share pencilled in for this year, the yield is a mouth-watering 6.8%.

Buoyant results are also expected on 1 June from Pennon Group (LSE: PEN), which owns South West Water. Profits are expected to rise 17%, and a forecast dividend payout of 52p implies a yield of 4.1%. Meanwhile, AWG (LSE: AWG), formerly Anglian Water, is expected to say profits rose 23%. Elsewhere, Severn Trent (LSE: SVT), is not only anticipated to report sharply higher profits, but it is also expected to flesh out details of the impending demerger of its waste management business Biffa.

By and large, water companies appear in good health and they are expected to continue to reports healthy profit growth. Additionally, there is nothing to suggest they won't continue distributing a significant proportion of their profits as dividends. But it still pays to keep an eye on their levels of borrowing, which in some cases can be eye-poppingly high. For instance, Dee Valley (LSE: DVW) is carrying debts of £38m, which is quite worrying for a company that is only valued at £45m. But interest payments are covered 2.8 times, which makes it less perturbing.

In my view, it is right that water companies are warning us about impending water shortages. While water may appear plentiful right now, it is possible that demand for potable water in some areas may outstrip supply within a decade. And the best way to curb demand is to make everyone accountable for what they use by adjusting prices accordingly. The upshot is that water companies look good bets for the long-term investor, and buying water shares now may not be a bad idea.

> Read our tips for cutting your water bills.