The nation’s largest trash business, Waste Management Inc. (WM), is a company that’s getting a little more attention than usual lately.
As it did last year, WM recently ‘pre-announced’ the upcoming year’s dividend increase, a nearly 9% jump its board intends to declare in February. At the stock’s recent price, that represents a yield-on-cost of about 3.8% for a new buyer.
This increase for 2010 is a step up from the 7% boost shareholders got in 2009, while WM’s accompanying press release was level headed as ever:
“This announcement reflects our continued commitment to returning cash to our shareholders. Waste Management continues to produce consistent and strong cash flows, as evidenced by the dividend increase.”
By my count, 2010 rings up seven straight years of dividend increases, though WM says six, apparently not counting a huge jump in 2004 that marked the beginning of the company’s current approach to dividends.
And if you’re known by the company you keep, WM is hanging around with some of the best lately.
It recently grabbed attention as one of the best ideas for 2010 from investment guru Mario Gabelli’s firm, and The Bill and Melinda Gates Foundation just doubled its WM stake, according to Barron’s.
What might these folks see? Big cash flow from a real trash king whose earnings will turn around with the economy, a decent 15% ROE, and dividend growth that’s been averaging about 10% over the past three years, for starters.
WM’s debt is about 120% of equity, but that didn’t dissuade Morningstar from recently boosting the company’s Financial Health Grade to ‘A’. Valuations are still reasonable, though no longer at the bargain lows hit during the economic downturn.
Which leads to a quick word about how the economy affects WM, because it definitely does.
Most of WM’s business is recession-resistant: residential and commercial trash collection and disposal. But there are also some other, highly cyclical revenue streams. One is the heavy-duty trash collection that comes and goes with construction activity. Others are scrap recycling and a waste-to-green-energy division.
As the economy improves, so will results in these business segments. In the meantime, WM has been managing its business adeptly, with price increases in the baseline trash collection business, as well as a significant cost cutting program. But with a payout ratio of over 60% of earnings, WM will need the benefit of some cyclical growth.
The company’s October earnings release showed profits beat estimates, but continued to drop. Management chimed in with some upbeat trash talk about business conditions stabilizing, and WM’s stock gained about 10% since then.
The stock outperformed the market and the Industrial Sector ETF (XLI) in the roughly three months following the earnings release, as well as over the trailing 2-years and 5-years, but has also suffered periods of underperformance.
Like most investments WM isn’t for everyone. Investors might want to consider their own views on the economy as part of their homework on this company. But with strong cash flows, a decent yield and shareholder-friendly dividend growth, for some investors WM might have a nice smell about it.
For those who’d like a little more trash talk, including a deeper dive into WM’s business, check out my Seeking Alpha article “Waste Management's Rising Dividends,” published in late September.
Reference and Links
Press Release “Waste Management Announces Plan to Increase Quarterly Dividend Payments by 8.6%,” December 17, 2009. http://finance.yahoo.com/news/Waste-Management-Announces-bw-3514200411.html?x=0&.v=1
Press Release, “Waste Management Announces Diluted Earnings per Share of $0.56 for the 2009 Third Quarter,” October 29, 2009. http://finance.yahoo.com/news/Waste-Management-Announces-bw-3861751034.html?x=0&.v=1
Morningstar, “Waste Management Grades and Key Stats,” December 2009. http://quote.morningstar.com/stock/s.aspx?t=wm
Seeking Alpha “Waste Management's Rising Dividends,” September 29, 2009. http://seekingalpha.com/article/163833-waste-management-s-rising-dividends
Disclosure: Long WM.