In December 2015 Moody’s Investors Services’ 12-18 month business outlook for the U.S. municipal water and sewer utility sector was “stable” – a rating that could certainly capture investor interest in a generally spike-y and under-performing stock market. The main factors in their decision were:
- The utilities’ power to set rates and their willingness to do so when needs arise, thus ensuring smooth operation even in the face of unforeseen events.
- The expectation that consumers will be accepting of utility rate increases based on the projection that the country’s economy will grow 2-3% in 2016, with low inflation.
- Although climate change will continue to pose a challenge, the results will be manageable due to strong cash reserves and access to federal aid in a weather-related crisis.
Moody’s did criticize the utilities for under-investing in capital improvements, pointing out that broken-down infrastructure can lead to operating inefficiencies and unreliable service – not to mention costly regulatory issues. On the whole, however, the sector was given a clean investment bill of health.
Water stocks outperforming expectations
The fact is that the stocks of the seven publicly-traded U.S. water utilities performed exceptionally well during the first four months of 2016, with every one of them reaching new highs in February. They contributed to the Dow Jones Utility Index (DJU) becoming the best-performing sector of the Dow Jones Industrial Average, with the DJU gaining 15.7% as of April 2016, compared to an overall gain of only 1.8% for the Dow.
How Flint may be impacting US water stocks
Some analysts say that the lead-contaminated drinking water crisis in Flint, Michigan is one of the factors spurring investor interest in water utility stocks. Although there was clear evidence of trouble throughout 2015, the governor declared a long-overdue state of emergency only in January 2016 and the White House made a similar declaration at the federal level shortly thereafter. Since then Flint has become synonymous throughout the US and around the world with criminally irresponsible mismanagement of the drinking water supply.
Clearly there are investors who believe that the crisis will make it more likely for states and cities to place municipal water utilities in the hands of private operators. Illinois, New Jersey and Pennsylvania have already passed legislation that would make it easier to sell municipal water works to for-profit companies – and a similar bill is making its way through the Wisconsin state legislature. It will be interesting to see if the lively investor interest in the U.S. water utility sector during 2016 is purely opportunistic or will remain robust even as a strengthening market offers a growing selection of attractive investment opportunities.
For more insights on trends in the U.S. water utility sector, see our interview with Ian MacLeod, VP Marketing of Master Meter (Arad’s US subsidiary): An Insider’s View of the US Water Industry.
 The 2016 Financial Guide To Utilities, Peter Chawaga, Water Online, January 15, 2016
 Climate Change Spurs Growing Investment In Water Stocks, Forbes, April 5, 2016
 Flint crisis creating bull market for water stocks, Paul R. La Monica, February 4, 2016