Waste Management: Trash to Cash

08/16/2013 7:00 am EST

Focus: STOCKS

As human activity continues to generate staggering amounts of solid waste around the world, you can profit from turning trash into cash, says John Persinos, contributing editor to Personal Finance.

The world's growing garbage glut is a hassle for government officials, but it's an opportunity for investors to achieve defensive growth amid an accelerating but vulnerable economic recovery.

One dominant company in the handling, treatment, and disposal of solid waste is Waste Management (WM). With this industry leader, investors are paying for market dominance, relative predictability, good dividends, and high cash flow.

Nationwide, the number of active landfills has shrunk from nearly 8,000 in 1988 to fewer than 1,900 today. The US disposes enough trash every day to fill 50,000 garbage trucks, with 18,000 pounds of trash in each.

The search for new methods of disposal is becoming more frantic among federal, state, and municipal leaders in the US. There's enormous variation in waste capacity among the states.

The problem perplexes global leaders as well. In particular, developing countries face huge waste handling problems, as their middle classes rapidly expand.

Waste Management is the world's largest solid waste collection and disposal company. It also treats and disposes of hazardous and medical waste, as well as operating waste-to-energy and landfill gas-to-energy facilities.

As the largest residential recycler in North America, Waste Management expects to recycle more than 20 million tons in the region every year by 2020, up from the 12 million tons the company handled in 2012.

Waste Management's services generate a robust cash flow that it largely devotes to acquisitions, dividends, and share buybacks. The company—now yielding 3.5%—has consistently paid dividends since 1998—and it continues to dole them out.

By acquiring or partnering with overseas waste management companies, Waste Management has been aggressively targeting emerging markets such as China. Growing revenue from an expanding global footprint should provide the company with steady growth for years to come.

Meanwhile, new regulations from global organizations designed to boost environmentally friendly technologies are a boon for transnational players such as Waste Management.

Notably, the World Trade Organization has significantly reduced tariffs on activities and products related to recycling, waste management, and wastewater treatment.

The stock's trailing 12-month price-to-earnings (P/E) ratio is 20.7, compared to 33.6 for its industry of waste management, making the stock a good value.

The stock also serves as a hedge against recession, because garbage will continue to be generated in vast quantities, regardless of any economic downturn.

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