1 BIG Reason to Like This Tiny Water Utility

Delivering water to homes and businesses is a decidedly old technology. In fact, the basic idea hasn't changed since aqueducts carried water into ancient Rome. Consolidated Water , however, is doing something drastically different, and it could give now arid regions a new chance on life.

The old school
Companies like Aqua America and American Water Works are traditional water utilities. They deliver fresh water and handle waste water. American Water Works is an industry giant, serving 14 million people in over a dozen states. Aqua America provides water services to around three million people across 10 states. Although that's notably smaller than American Water Works, it still makes Aqua America a big fish in the industry.

Growth for this pair can come from two areas. First, they can buy new water systems to expand their footprints. Aqua, for example, is an expert consolidator, buying more than 200 water utilities over the past 10 years. Second, the pair can invest in their existing infrastructure, upgrading aging pipes and systems.

With the tight fiscal circumstances facing many municipalities today, acquisitions should remain a solid growth driver. However, capital improvements will also be good business because regulators are likely to look favorably on such investments. That, in turn, will lead to rate increases. American Water Works, for example, says that without continued investment the percentage of U.S. water pipes classified as "poor" or worse will increase from 10% to 44% over the next seven years.

So the water utility model for companies like Aqua America, American Water Works, and even-smaller California Water Service is well known and not terribly high-tech. Investors should expect relatively stable dividends and dividend growth, but not much more. Consolidated Water, on the other hand, is beating its own path—and that could help change the lives of people in arid regions.

While the company handles water distribution, just like California Water and the others, it doesn't get its water from the same place. Consolidated Water uses reverse osmosis desalination plants to turn seawater, which makes up 97% of the world's water, into potable, or drinkable, water. That's huge and represents, pardon the pun, a sea of change for the water utility industry.

Right now Consolidated Water is pretty small. Its market cap is below $200 million. For comparison, California Water Services, with around 470,000 customers in more than 80 California communities, has a market cap of around $1 billion. But California Water doesn't have the potential, or the risks, that Consolidated Water has.

Consolidated Water operates 13 water desalination facilities in the Caribbean, with its largest presence in the Cayman Islands. However, it is currently working on projects in Asia and Mexico. These two markets could open up a whole new avenue of growth and turn this niche player into an important industry player. And its knowledge base and experience will be hard for others to replicate.

Of note, Consolidated's Mexico expansion is located in Rosarito, Mexico. That gives it access to the Tijuana market, but, more importantly, San Diego. California is a notoriously water-starved state, and this project could give Consolidated a foot in the door in California Water Services' core market. But, because Consolidated's business is a mix of handling water systems and providing water to water utilities, it would likely wind up being a key industry partner, not a competitor.

Add some spice?
You would be hard pressed to justify buying just Consolidated Water for exposure to water utilities. There's just too much risk. However, with an around 2.4% yield, the company measures up nicely against California Water (2.8% yield), Aqua America (2.5%), and American Water (2.7%). It would, thus, pair up well with another, less risky, water utility.

If all you want is boring and simple, stick to the trio of water utilities above—they're all good companies. However, if you'd like to add a little more growth potential into the mix, take a deeper dive into Consolidated Water's game-changing desalination operation.  

Discover our top stock pick for the new year
The market stormed out to huge gains across 2013, leaving investors on the sidelines burned. However, opportunistic investors can still find huge winners. The Motley Fool's chief investment officer has just hand-picked one such opportunity in our new report: "The Motley Fool's Top Stock for 2014." To find out which stock it is and read our in-depth report, simply click here. It's free!


The article 1 BIG Reason to Like This Tiny Water Utility originally appeared on Fool.com.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Aqua America and California Water Service Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story