Why the arrival of El Nino could lead to stronger returns for this ASX All Ords share

This ASX share could benefit from the hotter, drier El Nino weather pattern.

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The ASX All Ordinaries (ASX: XAO), or All Ords, share I'm going to cover in this article could be about to benefit from the next change in Australia's weather pattern.

In many places around the world, we're used to seeing seasonal weather changes throughout the year. But science has now shown weather goes through longer-term cycles as well.

The La Nina climate pattern triggers colder, wetter periods, while El Nino can cause hotter, drier weather.

According to various media outlets, including the ABC, we have now officially shifted from La Nina to El Nino. Not only that, but a positive Indian Ocean Dipole (IOD) has arrived too, which also can lead to less rainfall and hotter weather. It's reportedly the first time in eight years that both have occurred at the same time.

In practical terms, it could mean insurers may benefit from the lower potential of storms and flooding, but there's one particular ASX water share that I think could also benefit (and that I own in my portfolio).

Duxton Water Ltd (ASX: D2O)

Duxton Water owns a portfolio of permanent water entitlements. It can provide irrigators with a range of water offerings including long-term entitlement leases, forward allocation contracts, and spot allocation supply. At the end of August 2023, it had around 89GL of water entitlements.

I like to think of Duxton Water as a cyclical business that is exposed to supply and demand changes that can affect water prices. Quite simply, less rainfall could mean higher water prices and stronger lease income for the business.

In its latest monthly update, the company said the demand for leases "continues to be strong" due to the drier and warmer outlook. Irrigators are supposedly "seeking long-term water contracts ahead of anticipated drier conditions".

At the end of August, Duxton Water had 52% of its permanent water portfolio leased to Australian farming businesses. It had a weighted average lease expiry (WALE) of 3.2 years.

According to Duxton Water, allocation prices increased across most water regions in August 2023 and prices "continued to increase in the first two weeks of September".

Is the ASX All Ords share good value today?

At the end of August, the company had a post-tax net asset value (NAV) of $1.87. The current Duxton Water share price is at an 11% discount to this.

The business has been growing its dividend every six months since 2017 and has guided that the half-yearly payments will keep increasing for the next couple of years. By 2024, it is projected to have a grossed-up dividend yield of 6.25%.

I think the next couple of years could be beneficial for Duxton Water shares amid drier conditions and stronger demand for water access.

Motley Fool contributor Tristan Harrison has positions in Duxton Water. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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