Update: Check out Energy and Capital's water investment resource page for up to date information on investing in the water sector.
The other day I was chatting with my father about the current happenings in my hometown of Elkton, Maryland.
And, as with other similar conversations I've had with him, I couldn't help but notice the parallels between what's going on in Podunk and how I see the broader markets playing out.
Essentially, what I heard from my dad—and later validated with my own research—is a confirmation of the things I've been saying about the water industry for over a year now.
Here's an excerpt from a water investments report I wrote back in June of 2007:
To date, water and sewer bills, taxes, and private business foot the cost for most of the funds needed to build, operate, and maintain water and wastewater systems.
But those sources alone are not meeting the total current amount needed, let alone the increase that will be needed in coming years.
To meet future funding requirements, private firms in the industry will have to play a key role. The pressure of a competitive market, coupled with the introduction of new technology, will help ease the pain of an emerging funding gap.
Because right now the majority of water utilities are owned by states and municipalities, to help generate more funding, many of these utilities are going public. So much so that Lehman Brothers believes the number of people served globally by investor-owned water companies is expected to rise 500% over the next 10 years.
With the amount of money that has to come to this sector, investment opportunities will surely abound.
Water: Its Going Away is Not Going Away
A company I mentioned in that water report, Calgon Carbon Corporation (NYSE: CCC), was trading just below $10 per share at the time.
That stock is trading for $19.31—nearly double its level of just 14 months ago.
This is because, as I've said numerous times, the water issue is not going away. There is a finite supply of freshwater that is no longer enough to support the simultaneous rise of population and demand.
Much like oil, it's getting harder and harder to get easily accessible freshwater because aquifer levels are falling. And, due to the disappearance of polar icecaps, the supply of ice melt water that many countries and western states depend on is dwindling each year.
So we have to conserve water, reuse and treat more of the water we use, find new freshwater supplies, and increasingly employ desalination technology.
The companies that provide those services are going to make a killing. And you can profit right alongside them.
But back to my original thesis of the privatization of municipally owned water services. . .
The information my father passed on is the stuff you can only learn by reading a daily small-time newspaper.
Apparently, the Board of County Commissioners of Cecil County made a quick decision to privatize a portion of the county's water service once provided in-house.
Here's a part of the release from the Cecil County Government Website:
The Board of County Commissioners of Cecil County (BOCC) is pleased to announce the introduction of two agreements relating to the grant of a franchise to Artesian Water Maryland, Inc. /Artesian Wastewater Maryland, Inc., to provide water and wastewater service to the Elkton West franchise area. This endeavor is in response to action taken by the Board of County Commissioners on December 18, 2007. At the BOCC meeting on December 18, 2007, the recommendation of the Elkton West review committee was presented to the Board with respect to whom the county would engage in negotiations for the award of a franchise agreement for water and wastewater systems within the Elkton West service area, as contemplated in the request for proposals.
One can assume that this is due to growth in the county, including the addition of several large new communities, spurred by Cecil County's convenient location in the corridor between Philadelphia and Baltimore and by a Defense Base Closure and Realignment Commission (BRAC) action that will bring over 100,000 new employees to Aberdeen Proving Ground.
Presumably, the county's resources aren't enough to handle the current and coming growth.
Water Investments: Never Pay a Water Bill Again
My father, understandably, was weary of the news. A private water company would surely bring higher prices than the artificially deflated prices of a public utility.
Indeed, this is a precarious situation. Inflation is weighing on everyone, and nobody I know wants to pay more for anything.
Yet the fact remains, water is the world's most precious resource. We need it to survive. The laws of supply and demand always prevail, and limited supply coupled with surging demand has to lead to higher prices.
But I told him not to worry.
You can actually offset these rising costs, and even turn a profit in spite of them.
You see, the company being awarded the contract from Cecil County is Artesian Resources Group (NASDAQ: ARTNA), a publicly traded distributor and seller of water to residential, commercial, industrial, governmental, municipal, and utility customers.
Incidentally, this company made inroads to Cecil County earlier this year by purchasing the Mountain Hill Water Company, which included an 8,000 acre service area, a water treatment facility, four wells with a capacity of up to 500,000 gallons per day, a 500,000-gallon elevated storage tank and approximately 8 miles of main located at the core of the county's growth area between North East and Perryville.
Before the acquisition, Artesian provided engineering and operations services to Mountain Hill during 2006 and early 2007, including the construction of a new water treatment plant.
By buying shares of Artesian, residents of Cecil County can effectively offset any potential rise in water costs. This is because any additional revenue garnered from Cecil residents will show up on the company's balance sheet, ultimately being reflected in the stock's valuation.
What's more, Artesian—and most other water utilities—pays a hefty dividend. In June, the company announced a quarterly dividend of $0.1784 per share.
So, if you hold 200 shares and get the quarterly dividend four times, you're looking at dividend income of about $143 per year, which should be plenty to offset any rise in your water bill.
Of course, you're still out the money you ponied up to buy the shares, but held long-term, you'll see an increase in that investment as well.
It's win win.
Keep this in mind as water utilities in your area are privatized, and you'll never actually have to pay a water bill again.
Call it like you see it,