Waste Management: Gains in Garbage

05/16/2019 5:00 am EST


Tom Hutchinson

Editor, Cabot Dividend Investor

Some people say dividend stocks aren’t sexy. And there’s nothing less sexy than what I believe is the best dividend-paying industry today — garbage, explains growth and income expert Tom Hutchinson, editor of Cabot Dividend Investor.

You make a sure bet that our society will continue to produce a lot of garbage, it’s a guaranteed winGarbage is a big, smelly business. This country is drowning in garbage.

A consumer-oriented society like ours produces colossal amounts of trash. While the U.S. is home to about 5% of the world’s population, we produce about a quarter of the world’s waste.

Every year this country produces enough waste to reach the moon and back — 25 times. Each individual American throws out about 4.4 pounds of trash on an average day.

Nationwide, that amounts to about 700,000 tons daily, enough to fill Busch Stadium in St. Louis twice. The average American produces about 1.5 tons of garbage every single year. And it’s getting worse. We throw away twice as much as what we did in 1960.

Clearly society has a great need to deal with all this trash. One company is the king. And all that stuff you throw out everyday just keeps ringing the cash register for this boring dividend stock.

Houston-based Waste Management (WM) is the largest waste services provider in North America, operating 248 landfills and 310 transfer stations. It is also the largest recycler in the country. The company has over 21 million customers in the U.S. and Canada and over $14 billion in annual revenues.

It isn’t sexy. It’s a dirty business. Few upstarts have the desire to take on such a business or the scale and expertise to thrive in it. But for this industry behemoth garbage is a remarkably consistent and practical business that delivers a torrential downpour of free cash flow.

For such a boring company, returns in WM have been stellar and remarkably consistent. Over the past three years the stock has provided an average annual return of 22%, over the last five years it has provided an average annual return of 22%, and over the last 10 it averaged a 19% return per year.

These returns far exceed those of the overall market. The overwhelming majority of money managers underperform the S&P 500, but this garbage collector has consistently outperformed the major indexes. A $10,000 investment in WM 10 years ago would now be worth about $55,000, with dividends reinvested.

Bigger isn’t always better. But in this case, it is. The size and scale of the company enables it to process waste efficiently and at a much lower cost than would-be competitors.

Its expertise with regulators is unparalleled and the company is loving the easier regulatory environment of the Trump Administration. The company also has deep pockets that enable it to continually gobble up competitors and expand.

Over the past five years the company has managed to grow earnings at a rate of about 14% a year. And a similar level of earnings growth is expected to continue in the years ahead. Most large Dow companies have nowhere near that level of annual earnings growth. I don’t know of one utility that can compete with that.

The current dividend yield is a rather modest 1.9%, but it’s well supported by steady and predictable free cash flow and just a 50% payout ratio.

The stock is somewhat expensive, selling above five-year average valuations. But why shouldn’t it be? In these increasingly volatile markets a consistent performer in a very recession-resistant business should continue to be in high demand.

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