The world is facing a bit of a problem with regards to our shrinking natural resource reserves. As our population continues to skyrocket and demand is ever-increasing, a variety of commodities are facing long term pressures. However, while we can find alternatives to some of these- like oil or copper- one critical commodity is facing a serious crunch.
That would be water.
Water reserves around the globe continue to dwindle, while demand is surging. However, where there’s a problem there’s an opportunity for clever investors. Over the long haul, water could be one of the best sectors and commodities to place our bets.
A Looming Problem
While we can find substitutes for our oil addition, as the main ingredient for life, water isn’t so lucky. And unfortunately, we’re running out. The United Nation’s paints a very dour picture when it comes to the world’s water needs. According to the U.N., roughly 783 million people today do not have access to water at all, while a staggering 2.5 billion people lack basic sanitation needs.
Those numbers are scary enough, but when you add population growth they get even worse. Overall, the U.N. estimates that by 2025 that the world will have an additional 2 billion people. That will push water demand to exceed supplies by more than 56%- considering that only about 3% of the world’s water supplies are fresh.
Meanwhile, those with access to clean water and sanitation systems aren’t out of the woods either. Decades old infrastructure is need of repair. For example, in Dublin, Ireland, nearly one-third of all the water sent through its water system is lost to leaks in the pipes. In China, more than 90% of all the nation’s cities are connected to polluted ground water supplies. And here in the U.S., the EPA estimates that much of our water-based infrastructure- built during the 1950’s -is hitting the end of its useful life.
All in all, rising demand plus the need for new and repair infrastructure will result in some serious spending. Here in the U.S. estimates on water infrastructure spending top $384 billion, while global spending in the water industry will hit $20 trillion by 2025. That’s more than the entire $17 trillion U.S. economy and represents a growth rate of nearly 3,900% over 12 years.
Taking A Drink
Given the supply and demand constraints, the opportunity for investors in the water sector are certainly great. Luckily, there are plenty of ways to play the sector- from utilities to those firms that provide filtration and pumps.
The most popular and broad way is through the PowerShares Water Resources (NYSE:PHO). The $1 billion ETF tracks 29 different water firms including- Mueller Water Products (NYSE:MWA) and Pentair (NYSE:PNR) –with the bulk of its holdings in the industrial sector. Expenses are cheap at just 0.62%. So far, PHO has proven that water is the new blue gold as the fund has managed to outperform the S&P 500 since its inception back in 2005. Additionally, Invesco (NYSE:IVZ) –the ETFs sponsors- offers a global version of the ETF in the PowerShares Global Water (NYSE:PIO).
One huge area of growth for investors could be in those firms that provide all the required pumps needed for new/improving infrastructure. That means investors may want to bet on Flowserve (NYSE:FLS) and Xylem (NYSE:XYL). Both firms continue to rack up more contracts for their water pump offerings and remain cheap. Analysts estimate that FLS should produce earnings per share around $5 giving it a forward P/E of just 13. Meanwhile, XYL & FLS remain committed to returning capital back to shareholders via dividends and share buybacks. Overall, the pair along with smaller pump maker Gorman-Rupp Co. (NYSE:GRC) make ideal selections to play the infrastructure angle.
Speaking of dividends, the water utility sector offers some of the best and strongest paying firms around. Industry leader Aqua America (NYSE:WTR) continues to snag up smaller rivals and expand. That’s propelled WTR shares up nearly 28% this year- all on the back of a 2.6% yield. Meanwhile, those smaller rivals are pretty good as well on the dividend front. Both the York Water Company (NASDAQ:YORW) and California Water Service (NYSE:CWT) yield 2.8%.
The Bottom Line
There’s no doubt about it. The world is facing a water crisis. However, for forward thinking investors, that could mean a huge opportunity. Billions will need to be spent on improving water infrastructure and getting clean water to the masses. That could lead to some big portfolio gains in the years ahead. The previous picks- along with pipe producer Northwest Pipe (NASDAQ:NWPX) –are ideal selections to play the trend.
Disclosure – At the time of writing, the author did not own shares of any company mentioned in this article.
– By Aaron Levitt (Investment Journalist for Investopedia)