Companies that historically have had stable cash flows
During economic downturns, people still have a number of necessities: food, water, clothing, electricity, etc. Because they are considered a basic necessity, utility companies historically have had stable cash flows. This has caused their stocks to typically be less volatile than the overall stock market. One area of increased focus in the stock market has been on the water utility sector.
- Water utilities are heavily regulated companies that are primarily responsible for the distribution of water, wastewater treatment, and other similar services. In order to generate additional revenue, water utilities submit rate increases over time to state regulators for approval in order to cover the cost of expanding or improving infrastructure .
- Because water utility bills are relatively low for residential customers, consumption patterns do not typically change for these customers, whereas economic swings do affect the total use for industrial and commercial consumers – the source of the remaining 10-15% of a water utility’s revenue. Thus, the revenue of these companies could rise if the economy picks up speed.
- Increased consolidation has historically shown to be a proven way for companies to increase their cash flows. With the combination of 80 percent of the country being served by municipalities and many municipalities receiving lower tax revenues over the past few years, selling water systems to public companies has become a way for municipalities to improve their budgets. Therefore, further consolidation within the industry could improve sector profits. With the sector dividend yield at approximately 3 percent, water utilities may be an attractive option for some investors.
*The opinions and forecasts expressed are for informational purposes only and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. The representative does not guarantee the accuracy and completeness, nor assume liability for loss that may result from the reliance by any person upon such information or opinions.
Costanza, Andre. Industry Analysis: Water Utility. Value Line. Finance.yahoo.com 17 April 2012.
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