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Waste Management: Turning Trash Into Dividend Treasure

Aaron Levitt Apr 27, 2016


By and large, most Americans are blissfully unaware of what happens to the nearly 250 million tons of trash we generate every year. It’s one of the benefits of living in a modern society. We don’t have to think about it. But for those paying attention and operating in the $100 billion a year environmental services industry, it can mean some serious bucks. There’s plenty of green and gold in that garbage.


And those happen to be Waste Management’s (WM ) livery.

As the largest garbage hauler and environmental services firm in the country, WM makes a lot of green and gold. For dividend investors, Waste Management could be as good as they come.


One Man’s Trash


Waste Management’s operating gold comes down to being the top dog in a relatively boring, but stable, field. It’s very hard to enter the waste services industry thanks to high barriers to entry and regulation. Opening a new landfill is pretty much impossible for smaller mom and pop players, while the capital requirements needed to build transfer stations, hauling operations, and recycling centers in order to compete against WM is a staggering sum. Most haulers just can’t afford to do it.

Waste Management is the definition of a wide economic moat stock.

That moat works to WM’s advantage in several ways. For the most part, homeowners aren’t given the choice of which waste collection company to use. You’re basically required to use the company that is under contract with your municipality or haul your trash to the dump yourself. As one of the largest haulers, WM is able to outprice many of its competitors as its size allows for economies of scale. And when it doesn’t win a bid, usually it’s because a rival is willing to take a loss to win the contract.

Second, Waste Management charges a set fee regardless of the amount of trash hauled. Most customers, especially individual households, pay the hauler the same amount whether or not their trash can is full every week. And unlike electricity, gas, or water usage, individuals are locked in on their garbage disposal prices. Reducing your trash levels doesn’t matter, you still are required to pay the same amount.

These factors allow Waste Management to produce some of the most steady and recession-resistant cash flows out there.


Still Avenues for Growth


While that hauling operation is steady, WM isn’t just a boring utility. It has plenty of avenues for growth as well.

Waste Management was one of the first garbage haulers to turn a previous liability into a money maker by “drilling the pile” and tapping into the methane gas created during the breakdown process in a landfill. It now has 136 waste-to-energy facilities at its landfills.

WM has also moved into other areas of waste collection besides traditional garbage and recycling, including medical and hazardous materials disposal. Additionally, in energy producing hotbeds, like the Marcellus shale in Pennsylvania and the Eagle Ford in Texas, Waste Management offers fracking tailings removal and other clean up services. All of these higher-margined businesses provide WM with additional sources of revenue beyond the boring.

And let’s not forget that WM has been pretty successful at snagging up smaller regional haulers in bolt-on acquisitions in order to boost market share.


It All Comes Down to Cash Flows & the Dividend


All of this adds up to a stock that produces rising cash flows and earnings.

Last year, WM managed to grow its adjusted earnings per share by 13% on the back of its wide moat. This year, it expects another year of steady growth. Waste Management expects 2016 adjusted EPS to be $2.74 to $2.79, or about a 6% increase when taking the midpoint of that number.

Those rising profits have translated into big-time dividend growth as well. WM has managed to increase its dividend consecutively over the last 13 years; the latest increase was 6% back in February. All in all, Waste Management has grown its dividend 119% since 2004. Given its rising earnings and cash flows, WM’s current 2.9% yield will be worth more down the road.

The firm has also managed to reduce its share count by 27% over the last decade or so. That should continue to drop as WM recently announced a new $1 billion stock buyback authorization.


The Bottom Line


Garbage is a pretty boring business. But for Waste Management, it’s pretty darn exciting. The firm’s dominant position in the steady sector has made it a dividend champion. That should continue as new avenues for growth add to its bottom line.

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