Day: December 19, 2023

Some of the interesting traits that I’ve noticed with dividend investing over time is that it is vitally easy. When investing in corporations with well-established enterprise fashions, wise payout ratios, conservative steadiness sheets, and a dedication to their dividends, it is troublesome to not construct wealth and dividend revenue.

The Pennsylvania water utility, York Water (NASDAQ:YORW), is an instance of this in motion. York Water has paid dividends to its shareholders for 207 consecutive years, which is the longest streak within the nation. For context, this was so way back that James Madison was the fourth President of the US, and the Conflict of 1812 had simply ended a few years prior.

For the primary time since initiating protection in October, I will dig into York Water’s current outcomes for the third quarter and its valuation to clarify why I’m reiterating my purchase score.

York Water’s 2.2% dividend yield seemingly will not flip any heads. Nonetheless, it’s higher than the 1.5% yield of the S&P 500 (SP500). The 56% EPS payout ratio can also be considerably beneath the 75% EPS payout ratio that score companies suppose is sustainable for the business.

York Water’s low payout ratio is not the one purpose to suppose the dividend is fairly protected, both. The water utility’s 40% debt-to-capital ratio is properly beneath the 60% debt-to-capital ratio that score companies need to see from the business. This is the reason as of September 30, 2023, York Water’s credit standing from S&P was A- on a steady outlook (web page 10 of York Water’s most up-to-date 10-Q).

Accounting for these elements, Dividend Kings estimates the chance of the water utility reducing its dividend within the subsequent common recession is simply 1%. Even when a extreme recession cropped up, the possibility of a dividend lower stays low at 2.4%.

One other attribute that makes York Water intriguing right here is its present $38 share value (as of December 18, 2023). Primarily based on its historic P/E ratio and dividend yield, Dividend Kings values shares of the water utility at $47 every. This implies York Water’s shares are 18% undervalued.

If the water utility meets progress forecasts and returns to honest worth, listed below are the full returns that it may produce for shareholders over the approaching 10 years:

• 2.2% yield + 4.9% FactSet Analysis annual earnings progress consensus + 2% annual valuation a number of growth = 9.1% annual whole return potential or a 139% 10-year cumulative whole return versus the 9% annual whole return potential of the S&P or a 137% 10-year cumulative whole return

An Wonderful Third Quarter

When York Water shared its monetary outcomes for the third quarter ended September 30 final month, the corporate exceeded expectations. The water utility’s working income surged 18.7% larger year-over-year to $18.eight million in the course of the quarter. For context, that beat the analyst consensus by a whopping $1.eight million. This raises the query: What led to this strong progress price in working income?

York Water’s progress in working income was largely pushed by the speed case settlement with the Pennsylvania Public Utility Fee or PPUC again in January. It was estimated by the corporate that the common residential water invoice for purchasers would rise from $46.49 a month to $53.06 a month as a result of new charges. These larger charges went into impact starting in March of this yr.

Acquisitions and the ensuing progress in York Water’s buyer base generated the rest of topline progress within the third quarter. The corporate’s water buyer base edged 1.4% larger over the year-ago interval to over 71,500 as of September 30. Moreover, wastewater clients grew by 6.7% year-over-year to over 6,000 in the course of the quarter.

These working tailwinds have been barely countered by a $661,000 decline in distribution system enchancment fees for the third quarter. This reset to zero as a part of the speed case settlement with PPUC in January (buyer rely progress and distribution system enchancment cost data per web page 18 of York Water’s most up-to-date 10-Q submitting).

York Water’s diluted EPS soared 32.5% larger over the year-ago interval within the third quarter to $0.53. This topped the analyst consensus by $0.17. Slower progress in whole bills than in working income helped the web revenue margin develop by 440 foundation factors year-over-year to 40.3% in the course of the quarter.

York Water can also be a financially wholesome firm. This argument is supported by the truth that the curiosity protection ratio by means of the primary 9 months of 2023 was 4.7. This snug curiosity protection ratio leaves the corporate with room to service its debt and to fund the required capital investments to maintain steadily rising.

Constructing One other Spectacular Dividend Streak

York Water’s 207 consecutive years of paying a dividend is not its solely streak: The corporate’s 4% improve in its quarterly dividend per share earlier this month to $0.2108 prolonged its dividend progress streak to 27 consecutive years. This observe report of dividend progress additionally appears as if it may be maintained and improved upon over time.

That’s as a result of the analyst consensus is that York Water will submit $1.59 in diluted EPS in 2023. In comparison with the $0.8108 in dividends per share that have been paid this yr, that equates to a extremely viable 51% diluted EPS payout ratio.

Dangers To Take into account

York Water is a high-quality enterprise, however it nonetheless has dangers that needs to be weighed earlier than considering shopping for shares. For probably the most half, I might remind readers of the dangers that I introduced in my earlier article on York Water.

The geographic focus of York Water is arguably probably the most main danger to the corporate. York Water’s operations are utterly primarily based out of York, Adams, and Franklin counties in Pennsylvania. That topics the corporate to the potential for unfavorable price case outcomes and pure disasters that might materially impression its monetary outcomes.

Abstract: York Water Is A Basic “Boring” Inventory

It is in all probability not a coincidence that York Water flies below the radar of most traders. It’s because many individuals are searching for the following huge and thrilling firm they usually ignore companies with the reliability that may permit shareholders to sleep simply at night time.

York Water’s adjusted working earnings a number of of 24.Three is meaningfully lower than its historic adjusted working earnings a number of of 29.Four per FAST Graphs. If the corporate returns to this valuation a number of and matches progress projections, it may ship 28% cumulative whole returns by means of 2025. That is twice the projected cumulative whole return price of the SPDR S&P 500 ETF Belief (SPY) over that point. Due to York Water’s market-beating return potential in each the approaching two years and 10 years, I’m sustaining my purchase score for now.