Unloved but worth holding

Alex Brummer

Consumers may be irritated by the performance of water utilities, says Alex Brummer, but their solidity and growth potential make them sound investments

Yet despite the terrible reputation with the consumer and the clampdown on leakages and billing errors by the regulator, investment in water remains an attractive proposition both here in Britain and around the world. In Britain’s sophisticated privatised water industry the four main UK-quoted firms United Utilities, Northumbrian Water, Pennon Group and Severn Trent, have remained a sea of calm amid the stock-market carnage associated with the credit crunch. They are particularly attractive defensive stocks in the current climate because of the regular and predictable cash flow. This has also made private water companies attractive to private equity. The Australian bank Macquarie snapped up troubled Thames Water for £8 billion in 2006, after the German electricity utility RWE decided the poor publicity associated with running Thames made it an investment too far.

However, the difficulties of the regulatory environment for Britain’s water utilities (of which more later) should not be allowed to distract interest from the potential of the industry both in the Western economies and worldwide. Population growth in the emerging markets (and nations like Britain which have been boosted by immigration) means that water is an expanding and undeveloped industry, with the demand for clean, pure water growing all the time.

Steven Goldin, a vice-president at Standard & Poor’s, recently noted: ‘What infrastructure and water have in common is that both participate in global growth and an underlying demand for natural resources. These are long-term assets generating lots of cash flow, so are very stable from that perspective.’