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How to Invest in Water Infrastructure with WTR

While artificial intelligence may be the new electricity, water is the new gold. The investment thesis is simple. How can we invest in water infrastructure before the water crisis happens? Some say it’s already here. Esquire put out a great piece of journalism a few days ago titled The Water Crises Aren’t Coming—They’re Here which nearly managed to avoid politics (incredibly rare in ‘Murica these days) and also managed to put out some astounding facts.

Maybe you’ve never thought about it, but the amount of water on earth has always been exactly the same. It’s not evenly dispersed though. Brazil, Canada, Colombia, Peru, Indonesia, and Russia have about 40% of the world’s water. We’re talking about fresh water here, something that comprises only 3% of the world’s water with the rest being contaminated with salt. Two-thirds of fresh water is actually frozen at the moment. Americans use about 80-100 gallons per day, while in actuality all you need to survive on is about a half-gallon per day. (In the United States, less than 1% of municipal water is used for human consumption. The rest is used for things like bathing, watering gardens, cleaning, and cooking.) People on this planet won’t die from a lack of water, but they will die from drinking bad water.

The obvious solution to the water shortage problem is desalination, something we’ve touched on in past articles. The technology is expensive though, and for retail investors, there aren’t many pure-play desalination stocks to dabble in. The next best thing might be to look at utility companies that are investing heavily in water infrastructure. One such company we’ve been holding for quite a while is Aqua America (WTR).

Aqua America (WTR) – A Dividend Champion

Water Infrastracture: Aqua america company logo. Click to company to go to company websiteBefore we get into talking about the company, we’ll give you a bit of background on how we came across this stock. As we’ve talked about before, Dividend Growth Investing (DGI) is the investment strategy where a majority of our own personal investments lie. The principle idea behind DGI investing is to look for companies that have a track record of paying dividends – and increasing them every single year – over a sustained period of time. Any company that has managed to increase dividends for 25 years in a row is referred to as a “dividend champion”. Once a company has reached this status, they will usually try to maintain it at all costs.

When it comes to utility stocks, you will find some dividend champions, but you won’t see a whole lot of growth in their income streams. Aqua America is the exception to the rule having increased their dividend for 26 years in a row with an average increase of 7.5% over the past ten years. That’s pretty good for a utility, and future increases are expected to come from their growth plan of investing in water infrastructure – of which they already own quite a bit of:

Water Infrastructure: Aqua America's water infrastructure

Source: Aqua America Investor Presentation

It’s not just the infrastructure on hand, but also the investments in water infrastructure planned as part of Aqua America’s growth strategy. In 2017, they spent a record $478 million investing in water infrastructure. Those investments have been steadily increasing over time, along with their customer base:

Water Infrastructure: Aqua America Investments and Customer Growth

Source: Aqua America 2017 Yearly Report

America’s Water Infrastructure Problem

This is a good time to get into the growth strategy that Aqua America is pursuing which is largely focused on helping to solve a problem that the United States isn’t equipped to solve at the moment. In the U.S., there are more than 1 million miles of underground pipe, much of which is nearly a century old and in dire need of replacement. Aqua America is stepping in and acquiring customers from municipalities and then making the much-needed infrastructure investments that bring these water systems up to modern standards. (For example, every day nearly 6 billion gallons of water are lost due to leaking pipes.) In this year alone, Aqua America will make six acquisitions from municipalities totaling 16,325 customers. And they’ve barely scratched the surface:

Water Infrastructure: Aqua America States in Operation

Source: Aqua America Analyst Day 2018

When it comes to figuring out which municipal customers to acquire, each state differs based on what commitments are being made to improve water infrastructure. For example, in Pennsylvania (where around half of Aqua America’s customers reside) there is actually a surcharge for water infrastructure investments:

Water Infrastructure: Aqua States with Infrastructure Surcharges

Source: Aqua America Analyst Day 2018

This means that the customer is helping to fund the needed infrastructure investments which will actually result in the cost of water decreasing over time. That’s exactly what is happening in Pennsylvania, Aqua America’s biggest market. The cost of water is decreasing over time as a result of water infrastructure investments, operational excellence which comes from years of experience, and of course economies of scale as the company continues to get larger and larger through acquisitions:

Water Infrastructure: Cost of water over time in Pennsylvania

Source: Aqua America Analyst Day 2018

There is also a regulatory driver that has created an opportunity for investor-owned utilities like Aqua America. It’s something called “fair market value legislation” and it’s a law that went into effect several years back in Pennsylvania. The legislation will “help municipalities sell their aging water and wastewater systems to private sector investor-owned entities” and it’s presenting a great opportunity to acquire water infrastructure assets at a valuation that’s determined by a third party:

Water Infrastructure: Fair Value Legislation by State

Source: GWI

As you can see in the above chart, there are competitors in this space that Aqua America must contend with. It’s also risky when a piece of legislation dictates your strategy, since laws can change and there’s nothing that can be done about it.

Conclusions

In prior articles, we talked about 8 Water Technology Startups Helping Agriculture Grow Up and 7 Water Tech Startups Helping Keep You Alive. In both cases, we looked at some exciting water tech startups that are private. In the case of Aqua America, you have a publicly traded company that is investing large amounts of money into water infrastructure with a proven track record of making the right decisions when it comes to those investments.

As with all stocks, there are risks. One concern is the lack of international exposure, something we always want to see in the DGI multinational firms that occupy our portfolio. Aqua America is also a very small firm, with a market cap of less than $7 billion. Then there’s today’s yield of 2.36% which is a bit dismaying for investors who can get much better yields from other utility stocks. All things considered, we’ve been holding this company now for a long time and believe it’s a great way to invest in water infrastructure in a country where the people use more water than anyone else.

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