York Water: Even More Expensive

by The Compound Investor

The York Water Company (YORW) has a strong claim on being the coolest stock in the market. It has, famously, paid out dividends since the early-1800s, with that streak still uninterrupted too. Think about that for a moment. It started paying dividends five years before Napoleon Bonaparte died on Saint Helena. It had paid dividends for almost fifty years by the time of Abraham Lincoln’s assassination at the hands of John Wilkes Booth. Crazy.

The last time I covered it was back in early-2019. At the time, York counted circa 70,000 customers in-and-around Adams and York Counties, Pennsylvania. The company provides them with water and wastewater services, and in return they pay their monthly bill. That amounted to a $48.4m revenue business in FY18, of which York posted $13.4m in net income. It paid out $8.7m of that by way of cash dividends, leaving $4.7m to be added to the retained earnings balance. Nice and simple.

Low Growth

As you’d expect, the world in which York inhabits moves rather slowly. It served around 62,200 customers back in 2009, with that number rising to 71,400 as of the end of last year. It can, of course, occasionally raise prices too, with that combination leading to steady, albeit unremarkable, growth overall. Annual revenue has increased at a 3.25% per annum clip over the past decade.

As regular readers know, I think there is merit in this kind of steady low-growth investing. It does, however, depend on some help from the starting yield. For instance, York Water stock traded for circa $13.50 at this point ten years ago. Net income per share clocked in at 71¢ back then, with the annual dividend worth 52¢ per share. Back of the envelope math puts the then-dividend yield at 3.85%. Net income per share has grown at a 4.4% clip since then, with the dividend growing at a 3.4% per annum clip.

The above should lead to to a fairly unremarkable outcome. I mean, you get your 3.85% dividend right out of the gate, with circa 3.5% annual growth on top. In reality that worked out to roughly $6 per share in cumulative dividend cash against the $13.75 starting share price. For a very conservative asset, I can sort of see the attraction there – even more so heading into the era of ultra-low interest rates.

Valuation

Now check out what has happened to the stock price in that period. It is up by a factor of three, or circa 12% per annum on average. That is way in excess of income and dividend growth. Or put another way, the stock has continued to get more and more expensive.

The last time I covered York, its shares changed hands for around $32 each. The FY19 dividend came in at around 70¢, so call it a then-yield of 2.2%. Not particularly enticing was my view at the time. Here’s the thing: York stock now trades for around $43.75 per share. It has gained over 35% in the space of 18-months or so.

Now, the company will likely pay out somewhere in the region of 73¢ per share by way of cash dividends this year. I have the current dividend yield at just 1.65% on that basis. That is way too low for something that, at best, offers mid-single-digit annual growth.

In a different interest rate environment, I think this thing could be cut in a half. At best it would be like the slow deflating of a balloon, whereby several years of dividend growth is matched by a falling stock price. Granted, in a world in which the 10-year Treasury yields just 0.7%, that may not happen soon. But going forward? Yeah, it remains a real risk here.

Note

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