York Water: Oldest Dividend-Paying Stock in History (NASDAQ:YORW)

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York Water Company (NASDAQ: YORW) is the company with the honor of having the oldest still active dividend in the world. It’s the quintessential dividend stock. It is the oldest investor-owned water utility in the United States of America, and you find it operating in Pennsylvania, with continuous operations since 1816, making it a company with a 200-year dividend history. The company has therefore paid dividends for more than 575 consecutive quarters. It’s not necessarily the biggest growth history in terms of dividend growth, but it’s still a very impressive record.

There aren’t many companies that can claim to have paid dividends during the American Civil War and started paying dividends less than 50 years after the founding of the nation of the United States.

Let’s review the company and see what we have here.

What does the York Water Company do?

The company’s operations are deceptively simple. They capture and purify the drinking water of certain geographical areas. In addition to this, they have three sewage collection systems and five sewage collection and treatment systems.

Geographically, YORW’s operations cover an area of ​​51 municipalities in three south-central Pennsylvania counties and are tightly regulated by state and local commissions that oversee this work. The Company engages in billing, payment terms, dispute handling, terminations, service territory, debt/financing, and pricing with these public commissions, and must Obtain committee approval before changing anything to the above procedures.

The company obtains its water for its operations through its own distribution systems, supplied by springs from the south and east branches of a creek (Codorus Creek), with an average daily flow of 73 million gallons. Additionally, YORW has two large reservoirs holding 2.2 million gallons of water, supplemented by a 15-mile pipeline providing access to an additional 12 million gallons of raw water per day. Finally, the company has nine wells with the capacity to service another 600,000 gallons per day. On the supply side, the company is therefore very well served.

The company has a global service territory with a population of approximately 204,000 people. This includes a very mixed clientele, including very classic residences and some basic industrial/commercial with the manufacture of light fixtures, furniture, electrical machinery and many other fields.

York Water Company Service Area

York Water Company Service Area (York Water Company IR)

As a water utility, YORW’s business has environmental dependencies, particularly rainfall. Income impacts can be particularly heavy during dry spells, and dry spells can create supply imbalances where more water is used for water, washing, golf courses and other things that can lead to drought policies instituted by the government.

On the capital side, YORW is not a very capital-intensive or intensive business and does not require significant working capital to run its business. Nor is it in the least, dependent on a specific client. Its fully regulated and commission-controlled nature given its stunning the visibility and stability of earnings is very similar to that of an electric utility in terms of how its rates are raised and used.

The company’s proven operations have also given the company the opportunity to expand its administrative arm in terms of billing and sewer collection services.

Despite its extremely small size with a market capitalization of less than $1 billion and a relatively high debt/LT capitalization at 46.45%, the history and nature of the company has earned it an S&P credit rating of A- , which is quite surprising. by, as I see it.

YORW has also been a great investment on a historical basis. If you had invested money in the company at 21X P/E in 2002, your annualized RoR would be today, even taking recent declines into account, close to 9%, or 450% RoR in total.

Those are solid numbers for a company that essentially gives you a sub-2% dividend, but the longest consistent dividend in history. Keep in mind what I said – a constant dividend does not mean the longest growth. York Water Company does not hesitate to reduce this proven dividend if necessary. They did this in 2006 and again in 2008 – but since then it has had a streak of growth until it currently sits at around 2% yield.

The fundamentals of investing in a water business should be clear to everyone. People need water. People will continue to need water. The company operates one of the most proven systems in existence and is publicly traded. A water company is characterized by extremely secure cash flows and very low growth rates. Although the global water market will become much larger, it seems unlikely that YORW will see any part of this massive growth. However, large water companies with service areas of over 100,000 customers have long been preferred by investors due to their safe and reliable nature.

All of this business is characterized by a lack of competition (and commission interest in allowing competition) and incremental single-digit profit growth. Generally speaking, timings or market movements don’t really matter to water companies – people always need water anyway. It’s a feature the company shares with things like electric utilities, food, gas, and more.

It’s certainly not the most exciting trend – but when I invest, I don’t look for exciting trends.

I’m looking for reliable people – and YORW qualifies.

This business has been on my target list for some time, and given the decline we’ve seen, I’ve decided it’s time to really take a solid look at the business.

The company’s business is, at its core, worry-free. What we want to look at is the other side of the equation – the valuation of the question.

The valuation of the company

This is where the decision is made whether it is a good investment or not. YORW is trading at a predictable massive premium valuation due to its track record. Water companies are never cheap, and YORW is a good example. The 10-year average valuation of this company is close to 33.5XP/E, which is higher than its 20- and 30-year average.

However, recent trends have started to push this valuation down to levels not seen since 2017-2018 – and that’s where this article tries to come in, to see if valuations here are ripe for investment.

York Water Company Rating History

York Water Company Valuation History (FAST Graphs)

Provided you accept the company’s 10-year bonus of 33.5X or even a 5-year average bonus of 37X, there is an advantage to be had here in the company. With a forward valuation of 33.5X based on EPS growth of 4% through 2023E, the upside here is now in double digits at 11% per year, not including dividends (as these are not expected here).

York Water Company upside down

The rise of York Water Company (FAST charts)

You might even call this rise somewhat “conservative” given the trend of companies such as YORW moving upmarket more and more over time. If you allow a 37X P/E premium on part of the business, that upside increases to over 18% per year, excluding potential (small) dividends.

So there’s a definite upside to be had here – it’s just that that upside is very premium based which, based on slow earnings growth of less than 5%, isn’t exactly easy to justify beyond of more than 200 years of history.

It’s also crucial to remember that in times of trouble 20 years ago, the company was trading around 20X P/E. The downside potential if this were to repeat itself is significant – you could lose upwards of 25-30% of your investment for a while, although I believe an eventual recovery would occur.

In my investments, I try to find the safest and highest benefits available in the market. York Water Company is an advantage – but based on premium. Calling it “safe” would be an overstatement. the the society is safe – the benefit might not be. It’s a relatively safe return, as I don’t see the company cutting it. The market/segment is also safe – water is water and people need water.

But I’m always hesitant to invest at a very high multiple unless I see a significant gap, like with Adidas (OTCQX:ADDYY) or LVMH (OTCPK:LVMUY). These are companies where I happily pay multiples of 25X + P/E. YORW makes water – not exactly the same as luxury or world famous shoes. But its regulated status and history allows for some allowance for bounty here.

In the end, I am a little torn in my thesis for the company, and where I find myself on the side of the valuation of things. At the moment, I consider this company to have a valid and fair advantage at a P/E of 33X.

S&P Global has only one analyst following the company. This analyst has stuck with a stock price of $53-$55 for a very long time, and therefore considers the company over 35% undervalued here.

It’s possible, but I would still be hesitant to apply such massive bounties.

My own PT is closer to a 33X P/E and comes in at $45/share – and that’s where I would consider the company too expensive to buy.

So it’s not the cheapest or most beneficial company – but it’s certainly safe and a company you can definitely trust.

So my thesis is “BUY” with a PT of $45.

Thesis

My thesis for York Water Company is as follows

  • It is the oldest company that regularly pays dividends. It trades at a significant premium, but may well deserve some of that premium.
  • My target for YORW is a P/E of 33X, accepting the 10-year P/E average, which gives us a PT of $45/share.
  • YORW may not be the highest bet or the safest and cheapest bet, but it is a good bet, and I consider it a “BUY” here.

Thanks for the reading.

James T. Quintero