Water companies still look good long-term bets despite facing heavy criticism for making huge profits while at the same time admitting failure to meet leak-reduction targets.
"We never know the worth of water till the well is dry." ~ Thomas Fuller, Gnomologia, 1732
Not even in my wildest dreams would I have imagined that installing a Minky Rota-Lift Outdoor Airer in my back garden could be so uplifting. Thing is, I have never understood why my back garden never needed watering, and yet it remained lusciously green even in the midst of drought conditions. But now I know! It turns out that I may have an unconfined aquifer, which I accidentally discovered when I sunk the spike for my airer deep into the ground.
Other homeowners may not be as lucky when looking for water. Drilling for your own water source can cost about £100 a foot, which means that a 100-foot bore hole can cost £10,000. Nevertheless, some wealthy homeowners are still willing to put their hands in their pockets to secure a reliable source of water to circumvent hosepipe bans, which are becoming all too common.
The great lengths that some people are prepared to go to find water merely highlights the desperate state of Britain's water supply in some areas. But the strategic importance of water companies has not gone unnoticed by utility investors -- they have seen their investments appreciate significantly in the last three years. The table below details the total return for water companies and also the returns for the overall market.
| Company | Total Return
Since March 2003 | P/E | Yield |
|---|
| United Utilities
(LSE: UU.)
| +71.1% | 12.7 | 6.9% |
| Severn Trent
(LSE: SVT)
| +96.7% | 16.0 | 4.6% |
| Kelda
(LSE: KEL)
| +121.6% | 14.2 | 4.3% |
| AWG
(LSE: AWG)
| +209.6% | 16.5 | 4.6% |
| Pennon
(LSE: PNN)
| +140.2% | 15.2 | 4.2% |
| Northumbrian Water
(LSE: NWG)
| +163.6% | 15.2 | 4.2% |
| FTSE All-Share | +92.8% | 13.1 | 3.2% |
What makes water companies especially attractive are their generous dividends, which in the case of United Utilities is a mouth-watering 6.9%. Additionally, there is little to suggest they won't continue distributing a significant proportion of their profits as dividends.
Mind you, the danger for investors is whether utility companies will be allowed to continue to make, what many consumers consider to be, excessive profits. Recently, Thames Water, which is owned by Germany's RWE, faced heavy criticism after announcing a 31% rise in profits while admitting that it had failed to meet leak-reduction targets for the third year running.
Elsewhere, Sutton & East Surrey Water, which is owned by Deutsche Bank, said profits rose 21% despite the drought in south east England where it operates. The high profits have attracted the attention of the Consumer Council for Water, which said the company must deliver consumer confidence as well as investor confidence.
That is indeed a challenge that water companies must address if they are to avoid continual criticism from media-hungry politicians. Interestingly, the two are inextricably linked -- consumers will have more confidence in utility companies if they have tangible evidence that the businesses are investing more of their profits into improving long-term efficiency. And investors will have more confidence if they know that dividend will continue to stream in.
However, critics sometimes conveniently forget that potable water is a scare resource in the same way that other commodities are. Furthermore, with demand for water expected to rise some 10% over the next fifteen years, and supply very much in the hands of nature, the price of the commodity will need to rise. To me, that makes water companies a good long-term bet. That is unless I decide to open my own artesian well in my back garden. But will I want to draw my drinking water from it? Not likely -- especially after I've seen what my dog does in the flowerbeds!
More on investing in the wet stuff:Buy Water Now! | Red Hot Water Shares | Juicy Dividends On Tap
