York Water: Still Too Expensive

by The Compound Investor

Unless you are reading this from certain counties in Pennsylvania, then chances are you have never heard of The York Water Company (YORW). After all, this little utility stock has got to be one of the smallest I have covered so far. Its annual revenue will come in at around $50m this year, while it currently sports a market-cap that is barely over the $400m mark.

That said, York Water has one thing going for it that puts it ahead of almost any other stock on the planet: a monstrous multi-century long dividend record. The company has racked up a 203-year streak of consecutive distributions going all the way back to 1816.

Now, the last time I covered the stock was on Seeking Alpha back in 2017. York shares traded for around $33.20 at the time, with forward earnings estimates of around $1.02 per share. That’s right, York’s forward price-to-earnings ratio clocked in at a staggering 32x annual profit. Needless to say, it wasn’t exactly a screaming buy.

Unfortunately, it doesn’t look like a whole lot has changed since then. You can buy York stock for around $32 per share as things currently stand, while FY18 profit is expected to clock in at just over one dollar per share. What is the bullish case for paying over 30x net income here? I mean, this is a two-hundred year old regulated regional utility company we are talking about. The growth prospects reflect that.

Twenty years ago York made around 35¢ per share in net income. Earnings will probably register somewhere in the region of a dollar per share in 2018. That works out to average growth of circa 5.3% per annum, which I guess is what you might expect from a stodgy utility company.

Outlook

Let’s play a bit with some predictions over the next couple of decades. Assume for a moment that York replicates its 5.3% per annum average growth rate. It does that by periodically adding new customers and raising water prices. That would give us earnings per share of around $3.15 by 2040.

On top of that, let’s also assume that York’s legendary dividend grows at the same clip. That means the cumulative cash dividend pile hits $28.50 per share by 2040. Just to scratch out 7% annual returns would require the terminal P/E ratio to be over 30. How many investors are going to sign up to take that kind of risk?

Okay, but folks don’t buy a stock like York to get rich, I hear you say. This kind of stock is all about the chunky and reliable dividends. Yeah, the world could fall to pieces and I bet York would carry on supplying water at a profit to its 70,000 customers in Pennsylvania.

While the above might be true, the income situation doesn’t make all that much sense here either. I mean, York currently sports a TTM dividend yield of 2.1% based on the current share price. If we assume dividend growth matches recent historical earnings growth, then it would take an entire decade just to hit a yield on cost of 3.5% at today’s share price.

How many income seekers will sign up for that? It is much too low. I mean, you can go out right now and get the entire S&P 500 at a broadly similar dividend yield but with the prospect of far superior future growth. For the more income orientated folks, a large cap fund of ‘traditional’ dividend stocks might get you a 50% higher starting yield and with similar growth prospects to York. Ultimately, and whichever way you slice it, the stock is still just far too expensive.

Note

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