Rising urbanization and an ever-increasing global population make us acutely aware of how indispensable fresh water is. Although it accounts for a scanty 2.5% of the world’s total water content, the capital intensive water utilities are vigorously functioning to supply fresh water to meet every day needs.
But there are challenges far and wide plaguing the water utilities in the U.S. While the Western U.S. is faced with drought conditions in many places flooding is common in the Northeast. And added to this is the ageing infrastructure across the country that needs to be addressed immediately. The most unresolved and underemphasized factor − decaying infrastructure and the related funding gap – is undoubtedly spoiling the bright prospects of this vivacious sector.
The water industry is now under the public glare with reports from the U.S. Environmental Protection Agency (“EPA”) showing that an investment of around $384 billion will be required over the next 20 years to modernize and upgrade the old, soiled and decaying U.S. water and wastewater systems.
Is this the Right Time to Invest in Water?
The soft approach of the Federal Reserve to rate hikes may give regulated water utilities a reason to cheer. The Fed kept the short-term interest rate steady in the 0.25–0.50% band and indicated that only two rate hikes are likely for the year. At the end of the Federal Open Market Committee’s meeting, the central bank announced that it now expects the federal funds rate to rise to 0.875% by the end of the year compared with its earlier expectation of 1.375% that took into account four hikes.
The Fed has held itself from raising interest rates again given market jitters as well as a sharp slowdown in China. Resuming rate hikes impulsively could slow growth or rattle investors again. Although the global economy and financial markets may still create a menace, the economy has continued to grow moderately, the Fed said. Moreover, further strengthening in the job market is expected to offset those risks, the Fed said in a statement after a policy meeting.
As a result, utilities as a whole are expected to benefit from a low-rate scenario in the near term, as higher rates would have raised their financing costs and reduced their plea as dividend investments. The sector is a safe bet providing investors with steady returns in an otherwise volatile market.
In fact, the Dow Jones Utility Average index gained 13.97% year to date compared with a 1.02% gain for the Dow and 0.28% growth for the S&P 500. This mostly portrays the Fed’s assurance that future interest-rate increases will be gradual.
Fresh Water to Add to your Portfolio
We have handpicked four water utilities that carry a favorable Zacks Rank, which investors might consider adding to their portfolio given the fact that the water industry has rightly held its ground with a current Zacks Rank #25 out of the 258+ industries in our coverage universe.
