Take advantage of profits: water companies have traditionally been regarded as ‘bond proxies’
King Charles’ views on the environment, once considered radical, have gone mainstream. On the day of his coronation, it is worth assessing whether this shift is reflected in your portfolio.
Has the image and growth potential of the stocks you own been tarnished by a greater concern for the planet?
For example, you could have a lot of money in the three listed water companies: Pennon Group, the supplier to the South West, Severn Trent, which operates in the Midlands and Wales, and United Utilities, the supplier to the North West. The latter two are members of the FTSE 100.
These monopolies face political and regulatory challenges and higher interest rates. As a result, analysts at broker Jefferies state that there is “significant downside risk” hanging over the sector.
This is alarming news for private investors, some of whom have held these shares since privatization in 1989, when the king’s environmental activism was still surrounded by skepticism.
Wastewater is dumped into rivers every two and a half minutes, with United Utilities seen as one of the main culprits.
The government wants the private and listed water companies to spend around £60bn to solve sewage and storm overflow problems.
If Labor forms the next government, it will immediately impose fines for sewer leaks.
Water companies have traditionally been regarded as ‘bond proxies’ – companies that offer reliable returns that are superior to bonds. But Ofwat, the industry watchdog, now has the power to prevent dividends if they could jeopardize financial strength – and such payouts must be tied to performance standards.
However, most analysts still view Pennon, Severn Trent and United Utilities as a hold. This may be surprising, but they pay a good income. Their bosses are also aware of the transformation they must bring about, and the public and political disapproval that failure would bring.
The impacts of climate change also make a strong case for taking a long-term interest in the global water sector, with exposure to the companies developing the technologies that should help address the industry’s problems, including the aging infrastructure that causes 30 percent of the offer is lost.
The global water and sewage treatment market, valued at $299.8 billion (£237 billion) in 2022, is expected to reach $497.5 billion (£393 billion) by 2030, according to US analysts Precedence Research. The range of companies in this field is so large that there are several water stock market indices, the most famous of which are the S&P Global Water and the ISE Clean Water Edge.
Both include US powerhouse Xylem, which paid £5.9bn (£4.7bn) this year for Evoqua, a US group that claims to have solutions to ensure water is safe, reliable and available now and in the future. the future. This deal underscores the industry’s focus when freshwater availability is threatened by rising temperatures. Global water consumption has increased more than twice as fast as population growth over the past 100 years.
David Harrison, of the Rathbone Greenbank Global Sustainability Fund, says: ‘There is a focus on water scarcity, but also on making water cleaner and safer, especially in the US. We look for companies that are an important part of the ecosystem, as they provide the equivalent of picks and shovels – tools that are essential for change.
Badger Meter is one. This American company specializes in the digitally linked meters that identify problems in the water infrastructure and reduce leaks. We also invested in Halma, a British company whose activities include products for wastewater inspection and water disinfection.’
Such is the King’s commitment to water conservation that rainwater is used to irrigate Highgrove’s gardens and loos. Investors looking to support such systems can look to water funds, such as the Legal & General Clean Water ETF. Ben Yearsley of Shore Financial Planning likes the Schroder ISF Global Sustainable Food and Water fund, based on the premise that the world “needs to produce 70 percent more food and water and needs 70 percent fewer resources.”
These and other predictions have led me to take a closer look at my eco-conscious property. Fundsmith Sustainable Equity has served me well and I am pleased to see it have an interest in Idexx Laboratories, which has a water testing division. The planned increase in spending in the United States means I’m looking at the Quilter Investors Ethical Equity fund, which invests in American Water Works, the behemoth that should be boosted by infrastructure renewal spending.
The combination of payback for people, the planet and my portfolio is the kind of proposition I’m looking for.
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