Berko: Utility's history runs deep
Friday, August 30, 2013 7:00 AM
Dear Mr. Berko:
I want to make a long-term investment in some water utility stocks. What do you think of The York Water Co., which has been doing business in my state for almost 200 years?
W.H., Bethlehem, Pa.
In 1745, when Thomas Jefferson was a toddler playing in the cotton fields of Virginia and George Washington was an adventurous teenager, Mathias Aspden purchased a run-down brewery property in the village of Haddonfield, N.J., and commenced to build a tavern along the village’s main road. That road was called Kings Highway, and the tavern was called Indian King Tavern. In the 1750s, the Colonies were a narrow ribbon of coastal settlements about 100 miles wide, and Philadelphia was the largest and wealthiest city in the Delaware Valley. In 1816, Secretary of State James Monroe was elected president, succeeding the two-term presidency of James Madison. Also in 1816, a group of local businessmen gathered at Indian King Tavern, where they officially formed The York Water Co. and issued stock certificates.
That year, the board of directors contracted for 1,300 logs that were 12 feet long with an average width of 18 inches. Holes 3 to 4 inches in diameter were bored into the logs, and the logs were used as pipes. They were floated down the Susquehanna River and then transported by wagon from Wrightsville, Pa., where there was a spring in an area called Baumgartner’s Wood, which is now the site of Penn State’s York campus. Water was piped into the town square, and by the end of 1816, 35 homes had water on the premises. In 2006, 190 years later, York Water was invited to ring the bell at the Nasdaq MarketSite in Times Square.
In 1817, York Water (YORW-$20.23) paid its first annual dividend, and the dividends continued for 53 consecutive years. Then, in 1870, YORW began to pay dividends quarterly, and that continued for 143 years, or 571 quarters. Today this water utility has 105 employees and $43 million in revenues, aided by a growing population and occasional smaller acquisitions over the years. In its most recent fiscal year, ending in March, YORW had net profit margins of 22.7 percent and earned $9.5 million, or 74 cents a share, after paying its CEO a salary of $280,000. And the 55-cent dividend, which has been increased in each of the past 14 years, yields 2.7 percent.
YORW’s business is impounding, purifying and distributing drinking water. Along with this, the company runs a wastewater collection and treatment system and owns two reservoirs, which hold more than 2.2 billion gallons of water. YORW also owns a 15-mile pipeline, running from the Susquehanna River to Lake Redman, which provides an additional 12 million gallons of water a day, and two wells with a capacity of 100,000 gallons per day. This utility serves 64,000 customers (about 190,000 people) and supplies 18 million gallons of water a day for 39 municipalities in York County and eight municipalities in Adams County.
Revenues have more than doubled in the past 10 years, while earnings and dividend growth have been modestly attractive. The company has $87 million in debt, operating cash flow of $17.6 million, $4.6 million in cash and an $8 book value on each of its 12.7 million shares. Revenues and earnings for 2014 are expected to increase 10 percent over this year, and the 55-cent dividend may be raised again to 58 cents.
Meanwhile, BlackRock, Vanguard, Wells Fargo and GAMCO Investors are major shareholders, and I think this could be a good long-term investment. If you reinvest the quarterly dividend, YORW will give you a 5 percent discount on the market price of all your reinvested purchases. So if the shares trade at $19.78 when your dividends are reinvested, your purchase price will be $18.79 per share. You may also consider three other water utilities: California Water Service Group (CWT-$20.65), American States Water Co. (AWR-$55.24) and SJW Corp. (SJW-$26.29). All have a good record of revenue and dividend growth.