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Dividends from the Waste Pipeline

The waste management industry is so essential to the proper functioning of a densely populated civilization that we often forget about it. Much like the internet, water, or electricity, waste management is expected to be regular, consistent, ubiquitously cheap, and boring. Except it’s not.

The waste management industry is on fire, with all five of the largest waste management companies in the U.S. outperforming the S&P 500 over the last 10 years. Due to the way waste management services are purchased, and the way customers interact with waste management services, an oligopolistic market has formed and its leaders are poised to push their advantage.

Waste Management: An Oligopolistic Market

The United States generates the most trash per capita of any country in the world. Between 2010 and 2020 the market size for the U.S. garbage market is expected to grow from just over $100 billion to approximately $130 billion. The market for waste management was historically localized but over time a handful of extremely large companies have come to dominate it.

The market structure of the waste disposal industry is constructed in a way that promotes oligopolistic competition. An oligopolistic market is one that has a few large buyers and sellers whose actions are well known to each other and cause reactions from other participants.

Municipal waste service contracts are awarded to companies through varying means around the country. However, it is common that the applicants are attracted through an RFP, or request for proposal, format.

The format allows the municipality to outline the services required by the service providers, to which the service providers respond with an estimated price for the service. The services required in municipal waste RFPs are very strenuous; the provider must safely, promptly, and cost effectively remove the waste, and then store, or recycle, it. As you can imagine, the trucks, employees, convenient waste disposal, and waste storage systems required to win a municipal RFP are extremely expensive. These costs make it difficult and expensive for new companies to enter the waste disposal industry and form a so-called economic moat around existing companies.

As the existing companies grow, they can buy more well-positioned land, trucks, and hire more employees, allowing them to offer their services to a larger area, which in turn allows the company to offer a lower per unit price. Eventually these companies grow so large that they own the entire market since they own all the most convenient locations, have all the most efficient trucks, and have enough employees to service whole areas. Compounding this “scaling” effect is the fact that the citizens of most municipalities simply want their trash picked up on time and to pay as little as possible for that service.

The Nature of the Market

Waste disposal is a service that is homogeneous and elastic, which in English means that the citizens don’t care who provides the service and also don’t stop immediately demanding the service when prices go up. As an example of this economic theory in action, you probably only notice your local waste disposal company when they forget to pick up your trash or if they raise the taxes. Because of these market conditions, a few major players dominate the waste management space.

The performance of all five of the largest publicly traded waste management companies has outperformed the SPY 500 (SPY ) over the last 10 years. Beating the SPY is hard. To put the performance of these waste disposal companies into perspective, consider the fact that only approximately 30% of actively managed mutual funds beat the market.

Contributing to the amazing performance of these companies is the fact that the cost of throwing away garbage has increased, which, coupled with increased environmental awareness education, has contributed to a dramatic and corresponding rise in recycling. The largest waste management companies have recycling facilities already at scale to take advantage of the increase in recycling volumes. The larger and more efficient facilities produce profit through recycling at lower per recycling unit cost and then selling to manufacturers at lower prices and larger volumes. Due to compounding interest, a slight margin advantage of a larger company can expand the distance between two companies dramatically.

The rapid increase in recycling has caused an increase in scrap and a subsequent decline in scrap prices. The lower prices of scrap have damaged the profitability of smaller waste collection companies and slowed their ability to expand. Larger companies are impacted by low scrap prices as well but not as dramatically as the large ones due to the corresponding increase in the volume of recycling and diversification of their revenue sources. Further, larger waste management companies have the capital and scale to cutting edge capital improvements to their landfill land plays.

Paradoxically, green technology has arrived to landfills all over the U.S. Solar and methane capture systems allow for the renewable energy exerted by landfills to be captured, stored and recycled into additional profit. These technologies allow for waste management companies to leverage their landfill properties into additional revenue streams, exacerbating the benefits of scale through property location and size.

The Waste Management Oligarchs

Waste Management (WM )

Waste Management is the largest of the waste disposal companies and offers all types of waste management services. The company generated $13.39 billion last year and holds $273 million in cash. Their profit margin is a healthy 7.50% , with an operating margin of 14.20%. Waste Management has been paying out a stable dividend since 2004 and has hovered around 2.50%.

Republic Services (RSG )

Republic Services has had their stock rise from $20 in early 2009 to $40 today. The company provides non-hazardous waste management services to municipalities, commercial projects, and recycling services. They’ve paid a stable dividend since 2004 which has had an average yield around 3%. Their revenue was $8.96 billion last year, with a profit margin of 6.68%.

Progressive Waste Solutions (BIN)

Progressive Waste Solutions offers non-hazardous waste management solutions. The company also owns and operates a power generating plant fuelled by landfill gas. Last year they generated $2 billion in revenue, produced a profit margin of 4.36%, and had an operating margin of 11.44%. Progressive Waste Solutions has offered a dividend since 2009, hasn’t missed a dividend payment since 2010, and offers an average dividend yield of 2.25%.

Clean Harbors (CLH)

Clean Harbors specializes in hazardous waste management. These services are used by chemical companies, oil and gas companies, pulp and paper companies, as well as many other industrial processes. The company generated $3.29 billion in revenue last year, had a profit margin of -1.35%, and an operating margin of 6.47%. Clean Harbors is a waste disposal company that does not pay dividends.

Stericycle (SRCL)

Stericycle targets health care waste disposal. This includes medical waste disposal, pharmaceutical waste disposal, and product recall. The company does not provide a dividend but it did generate $2.72 billion in revenue last year. Stericycle’s profit margins are 11.06% and their operating margin is 22.06%. As the health care industry continues to boom, so will the demand for Stericycle’s waste management services.

The Bottom Line

Dividend investors might want to consider adding waste management companies to their portfolios as the need for waste management solutions will only grow with our ever-increasing population. Further, the oligopolistic nature of the industry means investors have a few stable, market giants from which to choose.

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