In the words of 1980s superband, or at least band, Dragon: it’s been raining, for so long. So, given the persistent La Nina conditions, why would any investor venture out into the pouring rain for a water-related stock?

When it comes to water rights pure-play Duxton Water, the answer is counter-intuitive. Trading under the cute ASX ticker D2O, Duxton shares have defied both the share market downturn and the unprecedented soggy conditions, rising three per cent year to date compared with the broader market’s circa 10 per cent decline.

Duxton’s reason for being is to own permanent water rights, which are either traded on the open market or leased to irrigators on multi-year contracts. Most of Duxton’s rights are in the southern section of the Murray Darling Basin, which accounts for the lion’s share of the nation’s tradeable water.

Put in context, the region’s rights are worth about $80 billion, but only $1-2 billion are actively traded.

The market emerged in the 1980s, when water rights were unbundled from farmland ownership. The philosophy was to direct water to the crops yielding the best economic return, as well as creating a mechanism for the government to buy back rights for environmental reasons.

Of course, some cockies argue that financial owners of water (such as Duxton) have no legitimate place on the agricultural landscape.

Whatever the case, water rights remain a niche asset and poorly understood by urban types. But they’re also inflation-resistant with a low correlation to almost every other asset class.

In theory, Duxton owns bucketloads of an asset in deep surplus, as exemplified by the Murray Darling Basin’s biggest reservoir, the Dartmouth Dam, overflowing for the first time in 26 years.

But the cost of a ‘bucket’ – a permanent right to a high-reliability annual allocation – held its value at around $7000 to $9000 per megalitre.

The key reason is that demand is becoming more inelastic because growers are shifting from annual crops such as cotton and cereals to higher-value permanent users, such as almonds, stone fruits and vineyards.

In dry years, the farmers still need to water their plants or else they will wither on the vine, literally and metaphorically.

While permanent rights have held their ground, the ample rainfall means temporary annual allocations are changing hands for around $45-80 per megalitre, compared with more than $1000ML in drought conditions three years ago.

On the usage side, the savvy irrigators are locking in supply for the next five – or even 10 – years.

Duxton holds rights to 84.5 gigalitres of water – about one-sixth the size of Sydney Harbour – valued at $382 million.

Currently 55 per cent of Duxton’s water is leased, at an average term of 1.7 years. The company’s target is to increase this proportion to 70-80 per cent, thus proving more certainty on future payouts.

On that note, Duxton has just paid a 3.3 cents per share final dividend and is comfortable enough to forecast a 7.1 cent total div 2022-23, as well as a 3.7c interim payout in 2024.

“We set the business up to be boring and predictable,” says Duxton portfolio manager Lachlan Campbell. “We can still pay dividends to shareholders when it is wet or dry.”

Duxton reports a post-tax net asset value of $1.92 per share. With the shares trading at around $1.60, it’s no surprise the company has been buying back its own shares.

The company adds that the weather is likely to normalise in the “not too distant future” – which means buying straw hats in winter can be a wise policy indeed.

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

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