Garbage In...Dividends Out

06/13/2013 7:00 am EST

Focus: STOCKS

Genia Turanova

Editor, Leeb Income Performance

This waste recycler has a strong customer base and recurring revenue that it gladly shares with its stockholders, says Genia Turanova of Leeb's Market Forecast.

That the slow economy hasn't been too generous to stocks leveraged to growth should not come as a big surprise to our readers.

On the other hand, those seeking safety and income increasingly turn to utilities, even if they are slow-growing and stodgy, as well as to other securities that exhibit utility-like qualities of high yield and earnings stability. Some of the best health-care stocks belong to this group.

As does, in our opinion, the largest US recycler, Waste Management (WM). Officially classified as an industrial stock, it has much less leverage to economic growth than your average industrial stock.

When it comes to Waste Management, though, its annuity-like revenues do make it look somewhat like a utility: More than 80% of its currently contracted permanent commercial and industrial customers have a contract length of three or more years—and the typical customer stays with the company for ten years. Moreover, its municipal customers tend to remain with the company for nearly 12 years on average.

Waste Management's subsidiaries provide trash collection, transfer, recycling, and disposal services. But Waste Management also develops, operates, and owns US waste-to-energy, landfill gas-to-energy, and independent power production facilities with clients in the residential, commercial, industrial, and municipal sectors nationwide.

Over the last few months, the stock has performed well, as its 2012 restructuring has been paying off. The market also viewed positively its $180 million January acquisition of Greenstar, a recycler that adds geographical footprint to Waste Management's reach—as well as extra volume to its brokerage business.

With this investment in Greenstar, Waste Management is furthering its commitment to recycling, as well as its goal of extracting more value from the materials under its management. The company now estimates that it can reach almost three-quarters of the goal to manage 20 million tons of recyclable material by 2020.

With a market cap of only $19 billion, this stock is also the leader in returning cash to shareholders. Not only is its dividend good for a current yield of 3.5%—one of the highest among the industrials—the company has also been actively buying back shares, with the pace of the buyback recently reaccelerating. Since 2007, Waste Management has returned $6 billion to its shareholders.

Analysts are expecting a long-term growth of about 6% or better for Waste Management, higher than the average 5% EPS growth expected for the utilities. And the yield is comparable to the yield on some of the utilities.

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