York Water Stock: Stability trumps volatility (NASDAQ: YORW)

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Dear readers,

In this article, we will provide an update on the York Water Company (NASDAQ: YORW). I wrote about this company a few months ago in April, and since that time the company has actually held back the impact of the recession rather well, confirming my overall bullish thesis on this company.

York Waterside

York Water Company Article (Looking for Alpha)

The York Water Company is the company with the oldest still active dividend in the world. It’s the quintessential dividend stock. It’s the oldest investor-owned water utility in the United States of America, and you’ll find it in Pennsylvania, with continuous operations since 1816, making it a company with a 200-year dividend history. . Few companies have such a long history – a few – but no company in existence today has the history of this.

What, if anything, has happened since my last post to keep this company as stable as this one?

York Water Company – Recent Results

As I mentioned in my original post about this company, the operations of the company 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. They do so in 51 municipalities in three counties. It is by no means a global empire.

As such, it remains relatively isolated from macro events, as it only delivers water to customers in a relatively limited geographic area.

York Water Service Area

York Water Region (YRWIR)

It does not serve tens of millions of people, not even a million or half a million. The company’s service area is about 200,000 people, more or less a few thousand people. This includes a very heterogeneous clientele, including very traditional residential and basic industrial/commercial with the manufacture of lighting, furniture, electrical machinery and many other fields.

As a water utility, YORW’s business has environmental dependencies; Specifically, precipitation. 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.

This is all quite logical, although it can be said that the environmental impacts are more severe today than they were a decade or even a few decades ago, given the slight changes in climate that we are experiencing.

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 any 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.

These things make the company a safe and non-volatile type of investment. To say these operations have a proven track record would be an understatement given, again, over 200 years of profitable history.

It also doesn’t really have a worthwhile market capitalization. At less than $1 billion, it’s a small company, and it has more than 40% debt of the ceiling. Despite this, S&P Global has given this unique company an A- credit rating, which is otherwise reserved for multi-hundred-billion companies. This should show you how the market views this company and the dividend security it could potentially offer you.

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.

So invested at the right time and with the right timing in mind, this company can really deliver absolutely solid alpha, despite its size and usual overvaluation.

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 though – 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.

As I mentioned in my last post – everyone needs water. The whole of this sector of activity is represented by a lack of competition, and a total absence of commissions and regulators to even To allow for any kind of competition here. 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.

Recent results more or less confirm this. The company issued its 606th consecutive dividend. It also reported 1Q22 revenue of about $14.24 million, up double-digits year-on-year, and net income on that $14 million-plus of about $3.859 million. The way these numbers and releases are structured is interesting, as this is one of the very few large companies that still reports earnings on a single dollar basis.

In short, the company saw the YoY uptick across the board that investors are used to expecting from YORW, including a slight uptick in every relevant metric, including declared dividends.

York Water Finances

YRW IR (YRWIR)

It’s fair enough to say that this company is really only a viable investment for the most patient and long-term investors. Those of us who have decades in the market ahead of us, who can wait for that 1-2% YoC to grow to 3-5%, and who are interested in this kind of conservative utility investing.

Fortunately, that’s the kind of investor I am.

York Water Company Assessment

YORW continues to trade 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. Since the business has become more expensive since my last article, the benefit is slightly lower now than it once was.

However, as I mentioned in the article when I got bullish on YORW, what we’ve seen is a drop to levels not seen in 4-5 years, and that’s where the business could get interesting.

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 close to double digits at 9.3% pa, excluding dividends.

Rise in York Water shares

York Water Company upside down (FAST charts)

You can still call it a conservative edge if you expect the company to maybe go back to that 38-40X multiple or so. The question is how much you want to put a bounty on a company like this. My answer to that is “not that much”. I’ll give the company a P/E of 30-33X – and, given that, it’s important to remember that in tough times 20 years ago, the company was trading around a P/E of 20X. The downside potential if this were to repeat is significant – you could lose upwards of 25-30% of your investment for a while, although I believe an eventual recovery would occur.

Would that mean the company is “bad”? No. Just that it would take time for you to recoup that investment.

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 company 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.

This company is in the same basket as other massive premium companies. These companies include things like Adidas (OTCQX: ADDYY) or LVMH (OTCPK: LVMUY). These are companies where I happily pay 25X+P/E multiples. YORW is, oddly enough, in a similar position, and I would happily pay that premium to gain access to water infrastructure investments for the foreseeable future.

It’s still not such a clean investment or bullish thesis that I would like to present. Any time a company trades above 30X, the demands on those cash flows and those securities are extreme. However, at the moment, I consider this company to have a valid and fair advantage at a P/E of 33X.

S&P Global only has an analyst depending on the company. Apparently, this is considered sufficient. 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. These goals have not changed for some time.

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. The company underperformed last year, having lost around 8% of its value – but it’s still better than most current investments.

York Water share price

York Water Company Awards (TIKR/S&P Global)

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. Based on today’s share price, the company is still somewhat underpriced and buyable here.

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