When you turn on the faucet of your kitchen sink or bathroom shower, it's easy to forget that behind the water is a really big business. From finding a clean source, to purifying it, and getting it into your home, there are plenty of ways to profit from good old H2O. And the demand for safe, clean water in every corner of the world has never been higher.
We were reminded of its importance last week with the United Nation's 20th annual World Water Day. Connecticut Water Services (CTWS) marked the occasion by ringing the closing bell at the Nasdaq marketsite. Their CEO, Eric Thornburg notes that World Water Day "commemorates the impact that water has on the lives of people all over the world. And of course in the U.S. we’re very proud of that impact, because people can take a drink of water and not have a second thought about its safety or freshness. But in other parts of the world you can’t do that. There are over a billion people around the globe that do not have access to safe drinking water."
But from that global crisis flows opportunity. Investors are catching on to the value of water and many believe it could be the next great commodity to invest in.
The S&P Global Water Index (CGW) outperformed the benchmark S&P 500 index last year rising 21% against the S&P's 16% gain. PowerShares Water Resources fund (PHO), the largest ETF in the sector, saw a 23% jump in 2012 as well, and Thornburg's Connecticut Water Services, despite facing some near-term price pressure, is up 20% in the last five years.
"I think the real investment opportunity is in the infrastructure and the systems that treat and protect this resource," Thornburg says. "Purifying the water and pumping it and storing it and having it available when it's needed, that's really our business."
One of the biggest challenges to the business is that aging water infrastructure. According to the U.S. Geological Survey, our country loses 1.7 trillion gallons of water annually due to leaks and water main breaks. That's enough to supply the ten largest cities in the U.S. for a year.
"Unfortunately there's a lot of backlog to catch up on because for many years people weren't replacing pipe on a systematic basis," Thornburg says."We replace one percent of our underground assets every year and then we apply a surcharge to customers bills to recover that capital."
Once Connecticut Water recovers that capital, shareholders reap the benefits in the form of a dividend yielding 3.3%. But money isn't the only perk of staying on top of repairs. Thornburg points out that his company's pipe replacement plan alone creates 160 high-paying, highly skilled jobs.
Still, new jobs means more spending for Thornburg and he isn't looking to Washington for help.
"We have chosen not to take advantage of federal funding," he says. "We’ve sought access to private capital because it is so much more efficient to attract it and deploy it and it doesn’t have nearly the load of regulatory requirements. I would really like to see our government leaders solve that because capital is really needed by the municipalities and towns who own their own water systems and that would help them to solve their problems."
Another one of those problems is demand. As the world population grows and water sources shrink, Thornburg's industry is increasingly concerned about keeping up. "Customers are going to have to be willing to pay a bit more," he admits, "and we’re going to have to be good stewards of this so that future generations don’t have to invest far more than they should."
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