2023-12-18 22:42:19 ET
Summary
- York Water has paid uninterrupted dividends to shareholders dating back to 1816, the James Madison administration.
- The water utility's operating revenue and diluted EPS surged higher in Q3.
- YORW's interest coverage ratio through the first nine months of 2023 was near 5.
- The water utility looks to be 18% undervalued versus Dividend Kings' fair value estimate.
- The Company could double the cumulative total returns of the S&P 500 through 2025 and slightly outperform the index over the next 10 years.
One of the most appealing traits that I have observed with dividend investing over the years is that it is very straightforward. When investing in companies with well-established business models, sensible payout ratios, conservative balance sheets, and a commitment to their dividends, it's difficult to not build wealth and dividend income.
The Pennsylvania water utility, York Water ( YORW ), is an example of this in action. York Water has paid dividends to its shareholders for 207 consecutive years, which is the longest streak in the country. For context, this was so long ago that James Madison was the fourth President of the United States, and the War of 1812 had just ended a couple of years prior.
For the first time since initiating coverage in October , I'll dig into York Water's recent results for the third quarter and its valuation to explain why I am reiterating my buy rating.
York Water's 2.2% dividend yield likely won't turn any heads. However, it is better than the 1.5% yield of the S&P 500 ( SP500 ). The 56% EPS payout ratio is also substantially below the 75% EPS payout ratio that rating agencies think is sustainable for the industry.
York Water's low payout ratio isn't the only reason to think the dividend is reasonably safe, either. The water utility's 40% debt-to-capital ratio is well below the 60% debt-to-capital ratio that rating agencies want to see from the industry. This is why as of September 30, 2023, York Water's credit rating from S&P was A- on a stable outlook (page 10 of York Water's most recent 10-Q ).
Accounting for these factors, Dividend Kings estimates the risk of the water utility cutting its dividend in the next average recession is just 1%. Even if a severe recession cropped up, the chance of a dividend cut remains low at 2.4%.
Another characteristic that makes York Water intriguing here is its current $38 share price (as of December 18, 2023). Based on its historical P/E ratio and dividend yield, Dividend Kings values shares of the water utility at $47 each. This suggests York Water's shares are 18% undervalued.
If the water utility meets growth forecasts and returns to fair value, here are the total returns that it could produce for shareholders over the coming 10 years:
- 2.2% yield + 4.9% FactSet Research annual earnings growth consensus + 2% annual valuation multiple expansion = 9.1% annual total return potential or a 139% 10-year cumulative total return versus the 9% annual total return potential of the S&P or a 137% 10-year cumulative total return
An Excellent Third Quarter
When York Water shared its financial results for the third quarter ended September 30 last month, the company exceeded expectations. The water utility's operating revenue surged 18.7% higher year-over-year to $18.8 million during the quarter. For context, that beat the analyst consensus by a whopping $1.8 million . This raises the question: What led to this robust growth rate in operating revenue?
York Water's growth in operating revenue was largely driven by the rate case settlement with the Pennsylvania Public Utility Commission or PPUC back in January. It was estimated by the company that the average residential water bill for customers would rise from $46.49 a month to $53.06 a month due to the new rates. These higher rates went into effect beginning in March of this year.
Acquisitions and the resulting growth in York Water's customer base generated the remainder of topline growth in the third quarter. The company's water customer base edged 1.4% higher over the year-ago period to over 71,500 as of September 30. Additionally, wastewater customers grew by 6.7% year-over-year to over 6,000 during the quarter.
These operating tailwinds were slightly countered by a $661,000 decline in distribution system improvement charges for the third quarter. This reset to zero as part of the rate case settlement with PPUC in January (customer count growth and distribution system improvement charge info per page 18 of York Water's most recent 10-Q filing).
York Water's diluted EPS soared 32.5% higher over the year-ago period in the third quarter to $0.53. This topped the analyst consensus by $0.17. Slower growth in total expenses than in operating revenue helped the net profit margin expand by 440 basis points year-over-year to 40.3% during the quarter.
York Water is also a financially healthy company. This argument is supported by the fact that the interest coverage ratio through the first nine months of 2023 was 4.7. This comfortable interest coverage ratio leaves the company with room to service its debt and to fund the necessary capital investments to keep steadily growing.
Building Another Impressive Dividend Streak
York Water's 207 consecutive years of paying a dividend isn't its only streak: The company's 4% increase in its quarterly dividend per share earlier this month to $0.2108 extended its dividend growth streak to 27 consecutive years. This track record of dividend growth also seems as though it can be maintained and improved upon over time.
That is because the analyst consensus is that York Water will post $1.59 in diluted EPS in 2023. Compared to the $0.8108 in dividends per share that were paid this year, that equates to a highly viable 51% diluted EPS payout ratio.
Risks To Consider
York Water is a high-quality business, but it still has risks that should be weighed before contemplating buying shares. For the most part, I would remind readers of the risks that I presented in my previous article on York Water.
The geographic concentration of York Water is arguably the most major risk to the company. York Water's operations are completely based out of York, Adams, and Franklin counties in Pennsylvania. That subjects the company to the potential for unfavorable rate case outcomes and natural disasters that could materially impact its financial results.
Summary: York Water Is A Classic "Boring" Stock
It's probably not a coincidence that York Water flies under the radar of most investors. This is because many people are looking for the next big and exciting company and they ignore businesses with the reliability that can allow shareholders to sleep easily at night.
York Water's adjusted operating earnings multiple of 24.3 is meaningfully less than its historical adjusted operating earnings multiple of 29.4 per FAST Graphs. If the company returns to this valuation multiple and matches growth projections, it could deliver 28% cumulative total returns through 2025. That's twice the projected cumulative total return rate of the SPDR S&P 500 ETF Trust ( SPY ) over that time. Thanks to York Water's market-beating return potential in both the coming two years and 10 years, I am maintaining my buy rating for now.
For further details see:
York Water: America's Most Proven Dividend Stock Is Still A Buy