By: Ahmed Ishtiaq
One man's trash is another's treasure; this line perfectly describes Waste Management, Inc. (NYSE:WM). It is the largest Trash management company operating through its subsidiaries and providing complete waste management solutions. At the moment, the company serves over 20 million residential, commercial and municipal customers throughout US and Canada. Waste Management is not content with the collection and disposal of waste alone; instead it is utilizing the waste to generate energy. Wheelabrator Technologies Inc, a subsidiary of WM is focused on generating energy from waste. Wheelabrator has 17 facilities with a combined processing capacity of 23,000 tons of solid waste every day and generate 669 megawatts (MW).
In addition, the firm has five independent power plants, which have the capacity to generate 227 megawatts of energy on a daily basis. So, Waste Management is a little more than your local waste collector. In fact, the major growth driver for the company will be the waste-to-energy segment in the future. In a previous article, I have explained in detail how Waste Management will achieve growth in the future. I have analyzed the business prospects as well as cash flows of the company in great detail in my previous posts. I have always believed that Waste Management is one of the best dividend payers in the market and tipped it to increase its dividends.
Dividends; A strong Pull
Waste Management may have disappointed its investors in terms of price appreciation during 2012, but its dividends have been solid as ever. Recently, the company increased its annual dividends to $1.46 from $1.42. This increase takes the company into the ten year club; the companies that have increased dividends for ten consecutive years. The stock offers a sumptuous yield of 4.33% based on the current price. The increase in dividends comes in line with my expectations as the company expects solid growth in cash flows. Waste Management is expected to experience double digit growth in its operating cash flows during 2013. The cash flows will remain strong for the company despite an increase of $100 million in cash taxes due to the expiration of bonus depreciation.
How the Company Will Fare in 2013?
Analysts are optimistic about the prospects of the company during the coming year. A Goldman Sachs analyst recently upgraded the stock from "Neutral" to "Buy". The main reason cited for the upgrade was the increase in volume of municipal solid waste, which will allow the company to increase prices. In addition, the analyst increased one year price target from $33 to $42. This backs my long-held view about the company. Revenue growth has been a concern for the company during the current year. However, an increase in the volume will allow the company to increase its revenues.
Waste Management is expected to end the year with total revenues of $13.6 billion, marginally above $13.4 billion reported at the end of 2011. Although revenues are expected show a small increase; the earnings have actually declined for the year. The company is expected to report earnings of $2.10 per share for the year. However, 2013 is expected to be a good year for the company, and the market expects it to generate earnings of $2.28 per share. Waste Management has also made some shrewd investments in conversion technologies, which will drive growth for the company. Over the past three years, the company has bought stakes in companies that turn trash into a source of transportation fuel, power and specialty chemicals. All of it is worth more than trash buried underground.
Recent investments made by the company indicate that it is trying to expand into lucrative conversion technologies. The company burned about 7.1 percent the garbage to generate electricity last year, and recycled 12 million tons of trash worth $1.58 billion in revenue. According to the estimates, the entire stream would generate about $12 billion a year.
Debt to Equity
Republic and WM trade at about the same valuation based on P/E; the trailing P/E for RSG is 17.20. Waste Connections is expensive, with a P/E of 24.8, and its yield is also lower than Waste Management. Waste Connections recently completed an acquisition of an oilfield waste treatment business, which can augment its revenue substantially. However, for the income investor, WM will be the best investment due to its size and stable dividends.
Waste Management is a stable stock, which moves within a narrow band. It has not shown big price movements during the year. Investors looking for growth stocks should look elsewhere. Waste Management provides a steady stream of income through its impressively growing dividends. I believe it is an ideal investment for income hunters. Furthermore, Waste Management should also provide some growth opportunities to investors. I see potential in stock price appreciation as well as dividend increase in the coming year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ahmed Ishtiaq, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.