Today (March 22nd) is World Water Day which aims to focus attention on the importance of water not only in our daily lives, but also for the sustainable development of the global economy. With the world’s population continuing to rise hand in hand with urbanisation, global water demand in 2050 could be up to 30% higher than today (Source: United Nations World Water Development Report 2018).
The essential nature of water is beyond dispute and the OECD estimates that almost $1 trillion of annual investment needs to be committed between now and 2030 to support the infrastructure behind water and sanitation on a global basis. The need for investment is particularly acute in the US where the infrastructure networks are creaking. Regardless of what comes of Donald Trump’s $1.5 trillion infrastructure promise, certain public services in the world’s biggest economy remain in a parlous state.
Report Card for America’s Infrastructure (2017)
As we all know, these issues don’t fix themselves, and require significant investment – crucially from the private sector. Thankfully the US regulatory environment is supportive of incentivisation plans that engender this investment. It’s a long road ahead, but the ingredients are in place.
This lies in contrast to the environment in the UK, where political and regulatory risks are clearly on the increase. We can only speculate about the fate of UK utilities in the event of a Labour government, but in the meantime the regulatory pressure on the sector’s allowable returns has intensified.
In the US, the need to attract investment from the private sector is increasingly being recognised, with a view to financing the upgrades required for the nation’s ailing infrastructure networks. Broadly speaking, the US enjoys a regulatory environment where companies are permitted to generate a reasonable return – a reasonable return for the benefit of all stakeholders, including providers of capital.
This stark contrast in regulatory regimes is manifested most clearly in the dividend progression of utilities. In the UK, the sector’s dividend growth is barely positive in nominal terms and has failed to keep up with inflation, while its US counterparts have delivered higher growth rates and more importantly growth ahead of inflation – which investors would reasonably expect. The difference is striking.
The divergence of outcomes has not gone unnoticed in the stockmarket where UK utilities have been punished accordingly. It is difficult to see how the uncertainties will be resolved in the short term.
Looking beyond the interest-rate jitters which have hampered the performance of defensive sectors in recent months, we see some excellent investment opportunities in US utilities over the long term. In what many consider as a boring sector, some US utility businesses have delivered double-digit dividend growth in the current reporting season. Don’t be put off by the label. What you may find might surprise you.