Waste Management (WM, Financial) has increased its dividend payments each year since 2003. The company is the largest publicly traded waste management company, with a market cap of $22 billion. The company’s largest competitor is Republic Services (RSG, Financial) which has a market cap of about $14 billion. Waste Management was founded in 1968 and is currently headquartered in Houston, Texas. Waste Management is the second company analyzed in the Dividend Achievers series. The company’s business operations are examined below.
Business overview
Waste Management’s operations are divided into six segments. Each segment is shown below along with the percent of total revenue each segment contributed to the company in its most recent quarterly report:
- Collection: 51% of total revenue
- Landfill: 18% of total revenue
- Transfer: 8% of total revenue
- Wheelabrator: 5% of total revenue
- Recycling: 8% of total revenue
- Other: 10% of total revenue
The Collection segment is Waste Management’s largest by far. The segment collets payments for collecting waste and recyclables from wherever they are generated and transporting them to a disposal site, recovery facility, or transfer station. The Collection segment generates revenue from commercial, residential, and industrial clients.
The Landfill segment is Waste Management’s second largest segment based on revenue. The segment charges tipping fees for waste disposed in each landfill. Waste Management has the largest landfill network in North America. The company had 262 solid waste landfills and 5 hazardoues waste landfills at the end of its fiscal 2013.
The Transfer segment operates 300 waste transfer stations in North America. Waste transfer stations act to compact and transfer waste for delivery to its final destination.
Waste Management’s Wheelabrator segment includes 16 waste-to-energy facilities and 4 independent power production plants. The waste-to-energy facilities burn solid waste releasing heat which causes steam to generate electricity. The company’s independent power producing plants convert waste and conventional fuels into steam. Despite impressive sounding operations, the Wheelabrator segment is Waste Management’s smallest based on revenue.
The company’s Recycling segment provides communities and businesses with single-stream (no need to separate recyclables) recycling services. The Recycling segment also sells commodities it generates from its recycling operations. The segment generated 8% of the company’s total revenue in its most recent quarter.
The "Other" segment includes various smaller operations including: recycling brokerage, electronics recycling, and waste consulting. Waste Management’s "Other" segment is substantial; it generated 10% of revenue in the company’s most recent quarter.
Competitive advantage
Waste Management’s competitive advantage comes from its established network of transfer stations, landfills, and transportation fleet. The company’s 390 collection operations, 310 waste transfer stations, 262 solid waste landfills, and five hazardous waste landfills create a network with high upfront costs that acts as a barrier to entry to the trash disposal and recycling market. It would take a start-up competitor an enormous up-front investment to match Waste Management’s established operations.
In addition to the company’s strong network, Waste Management operates in a highly regulated industry. All landfills require certification from the government. Legislative burden creates a secondary barrier to entry which reduced competition in the waste management industry. Significant barriers to entry have helped Waste Management to consolidate the market. Waste Management and Republic Services account for about 40% of North American waste service revenue.
Growth prospects
Waste Management has only been able to grow revenue per share at about 3% a year and EPS at about 5% a year over the last decade. The company’s per share numbers are boosted by solid share repurchases. Total company revenues have grown at less than 1% a year over the last decade; weak results for a company with a strong competitive advantage.
Waste Management is repositioning itself to focus on its core offering of waste services. To this end, the company is divesting its Wheelabrator segment operations. The company announced this year that it would sell Wheelabrator to Energy Capital Partners for $1.94 billion. The deal is expected to close in the next few months.
Waste Management will likely use funds from the Wheelabrator divestiture to acquire additional solid waste companies. About 2 months ago, Waste Management announced it was acquiring Deffenbaugh Disposal. Deffenbaugh Disposal is a refuse business operating in Kansas, Missouri, Arkansas and Nebraska. The acquisition will strengthen Waste Management’s position in these states.
Going forward, I expect Waste Management to grow somewhat faster than it has over the last decade. The company is focusing on what it does best and using bolt-on acquisitions to strengthen its market share and competitive position. Going forward, I expect the company to generate EPS growth of between 5% and 8% a year from share repurchases (2%), organic growth (3% to 4%), and margin improvements from efficiency gains (0% to 2%).
Dividend analysis and valuation
Waste Management currently has a strong dividend yield of about 3.1% and a payout ratio of about 55% of expected full year 2014 adjusted earnings. The company is currently trading at a P/E ratio of about 18 full-year expected adjusted EPS of $2.70.
Over the past five years Waste Management has traded at a slight premium of about 1.05x to the S&P 500’s P/E ratio. I believe the premium valuation is due to the company’s strong position in the relatively stable waste industry. Waste Management is currently trading at a slight discount to the S&P 500’s P/E ratio. As a result, I believe the company is slightly undervalued relative to the overall market at this time.
Recession performance
Waste Management’s earnings remain stable throughout recessions. The company’s services are necessary regardless of the overall economic climate. As a result, Waste Management’s earnings are not significantly impaired during recessions. The company’s before, during, and just after the Great Recession of 2007 to 2009 are shown below to give an idea of how the Waste Management performs during recessions.
- 2006 EPS of $1.82
- 2007 EPS of $2.07
- 2008 EPS of $2.19
- 2009 EPS of $2.00
- 2010 EPS of $2.10
Final thoughts
Waste Management is a relatively safe investment for investors seeking current income and reasonable growth potential. Overall, Waste Management shareholders could see total returns of between 8% and 11% a year from EPS growth (5% to 8%) and the company’s dividend payments (~3%).
Waste Management falls short of the high level of security required by The 8 Rules of Dividend Investing because the company does not have 25 or more years of dividend payments without a reduction. Despite not having an extremely long dividend history (it does have over 10 years of consecutive increases), Waste Management’s stable cash flows and strong competitive advantage make a sound investment in a diversified portfolio for risk averse investors.
