“Endless Income Stream” of safe money

by Travis Johnson, Stock Gumshoe | February 13, 2009 9:07 am

The ad I’ll start to look at today is from Roger Conrad[1] for his Utility Forecaster[2] service — a newsletter that looks primarily at, you guessed it, utility stocks. He has over the years considered the word “utility” fairly broadly, so if there’s any company that provides an essential service and pays a good dividend it’s possible that he’ll consider it.

So what is he telling us to buy? Well, he is, no surprise, bullish on utilities[3] — he mentions that both Buffett and John Paulson[4] have been buying utilities in the last year, seeing good prices for historically stable dividend-paying businesses; and even though prices have recovered significantly for many of these companies, he still sees many high yielding stocks that he thinks you should buy.

He teases these as his “Endless Income Stream” companies, so let’s have a look for the first one:

“Endless Income Stream #1

“… water[5] wars are heating up like the oil[6] wars before them. And water industry stocks are about to do the same, giving you profits of 100% or more in the next two years…

“… the scarcer water becomes, the more valuable your investments will be.

“One water stock in my Utility Forecaster portfolio has paid dividends[7] for 58 straight years. The stock has split six times in 12 years, and has given subscribers an average of 40.99% every year for the 15 years it’s been in the portfolio!

“That’s on top of dividend payouts that are some of the biggest and steadiest you’ll ever find.

“Now a crisis opportunity means even bigger profits for you….

“The United Nations warns that water wars could soon become armed major conflicts. By 2050 nearly half the world’s population will live in areas that are chronically short of water.”

So that’s the broader argument — one we’ve probably all heard several times from various prognosticators and pundits. But of course, we wouldn’t be looking at this if he wasn’t teasing a specific stock for us, too … so what is it?

“… the company that gets the technology right stands to become a global leader.

“And I know who’s got it right. Invest in this company and the income from this stock alone could fuel a healthy retirement[8]….

“‘Desalination’ is the word to remember. The technology that extracts salts and other impurities from brackish water is fast becoming a global force.

“One company is already a leader in desalination. They built their first sea water reverse osmosis plant in 1989 and have continually improved technology since then, putting them light years ahead of most competitors.

“They are actively buying up other water providers and are now a global leader in desalination technology. With exclusive long-term, fixed price contracts and little competition, they’re growing like mad.

“Dividends have rocketed 650% in the past 10 years, jumping 20% in 2007 alone.

“Yet even though a recent outstanding earning announcement lifted the stock’s share price, it’s still well below its highs after being hit in the fourth quarter ’07 tumble.

“The company’s superior technology, long experience, and strong management and acquisition business model, combined with a thirsty planet, place this stock right in the sweet spot for investors. It could double in the next 12 months.”

So … you can sign up for Roger Conrad’s service, and he’ll send you his report about this company … he calls it the “Liquid Gold Rush.” Or you can just read the next paragraph…

The Thinkolator churns and chuffs a bit, but tells us that this is probably …

Consolidated Water Company (CWCO)[9]

“Global leader” might be a bit of an exaggeration about their technology, I can’t really judge that, but it would certainly be an exaggeration about their size — this is a relatively small company that runs desalination plants throughout the Caribbean basin (and soon, in Bermuda). Their dividend has gone up 650% since 1998, so that matches, and they did build their first desalination plant in 1989. It has also been an acquirer, over the last 20 years or so they’ve picked up plants in Belize, the British Virgin Islands, the Bahamas, and elsewhere.

The yield is not remarkable at this point, it’s about 2.3% annually, but it has been growing. But that’s where I stopped working on this one, so I do need to let you know that it’s possible that I could be wrong here — CWCO did not raise their dividend by precisely 20% in 2007, from what I see in Yahoo[10] Finance they raised the dividend from 24 cents to 26 cents a year, though I suppose with the odd timing of some of their dividends (some years have had three, some five due to the payment timing in December vs. Januay) you could probably make it fit that there was a big, if misleading, annual increase). I suspect this might be one of those common year-end dating mistakes, too, since not many companies really took a meaningful fall in Fall 2007, at leaset when compared with their Fall 08 performance, I think those 2007 references are probably meant to be for 2008. There were five “quarterly” dividends in 2008, so although the dividend didn’t get hiked in 2008 the total dividend actually paid during the calendar year certainly did jump, technically.

So this might be wrong — but it is one of the relatively few companies that’s focused almost entirely on reverse osmosis desalination (especially few when you talk about US publicly traded companies), it has seen the long term dividend growth teased, and it did build that first seawater plant in 1989, so it’s the best solution I’ve got.

I’m guessing the first part of the teaser, the portfolio company that split 6 times in twelve years, was talking about a different company, since the best match for splitting that many times is probably Aqua America, an acquisitive but otherwise pretty plain vanilla US water utility operator (not so much into desalination), but that’s neither here nor there. What can we learn about Consolidated Water Company?

I don’t know much about the history of desalination technology, but certainly Consolidated Water didn’t invent it — by the late 1980s when they apparently built their first reverse osmosis plant there were already at least dozens of desalination plants of all types in the Middle East[11] alone, and I think there had been industrial-scale desalination plants in that region for at least decades, though reverse osmosis is a more recently popular technology. (That’s where the money is for this business — I would guess that Saudi Arabia remains the biggest market for desalination, but it could be elsewhere in the Middle East or North Africa[12], perhaps Algeria[13] or Kuwait).

Water investing has been a big theme, especially for those who like a good story, for several years now (at least) — it has fueled many newsletter campaigns, gotten plenty of press (including this recent Forbes[14] article), and driven the creation of several water ETFs, too, for those who like to play these themes in a more diversified fashion (the ETF tickers are FIW, CGW and PHO if you’d like to research them). Of course, the allure of this story hasn’t prevented all of those ETFs, and the vast majority of the stocks they include, to be cut roughly in half over the last eight months like, well, everything else. CWCO is no different, it trades for about $12 now and was near $25 early last year.

Consolidated Water does seem to have, at least, a steady stream of cash and a competitive advantage in their niche, since they’ve got long term contracts with many of their customers in the Caribbean, and the plants are very small in comparison to those that make big headlines like the newer plants in Saudi Arabia, Algeria or Australia[15], so it might be that Veolia and GE and the other big players aren’t putting in bids to build or run these plants, I don’t know.

On the other hand, CWCO shares the same relatively steep valuation as many other water utilities, thanks to the perceived stability of the business (it’s just that “relatively steep” now means a forward PE of 15, not the 25 or 30 these stocks might have gotten a year ago) … and the main source of increased water demand in the Caribbean is … tourism. If the US and Western Europe have a prolonged recession and people give up their vacations, it wouldn’t be surprising to see their sales suffer a bit. They do have deals that allow them to sell water at fixed prices with adjustments for fuel and other costs, but if they sell less water, I would imagine that they make less money.

So … perhaps not quite a perfect match, but an interesting company — I know folks have looked at many water stocks in this space before, from wacky ones like PICO Holdings (PICO)[16] to giants like Veolia (VE), and many more, in addition to the several ETFs I mentioned above. I’ll admit that the argument in favor of water stocks seems obvious — it is, after all, the one truly essential commodity, but that does bring its own risks in the long term. If there really are “water wars” in the future on any great scale (there are already local disputes, generally between neighboring governments over shared rivers and aquifers), will governments intrude if private companies profit in significant or obvious ways from shortages of this most essential resource? Hopefully if such concerns have any merit, that time will be far, far in the future.

Let us know if you’re interested in desalination, or in water stocks in any other way … and I’ll try to soon get around to looking at some of Conrad’s other “Endless Income Streams.”

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