Buy Waste Management For Income Not Growth

| About: Waste Management, (WM)

Previously, I've recommended two foreign companies on the environmental services industry for income investors, namely French companies Veolia Environnement (VE) and Suez Environnement (OTCPK:SZEVY). However, both companies still have a heavy exposure to its domestic market and for investors unwilling to take so much exposure to a slow-growth economy like France, Waste Management (NYSE:WM) can be a good alternative within the environmental services industry. The company is listed on the New York Stock Exchange and has a market capitalization of $20.6 billion.

Company Overview

Waste Management, Inc. is a waste management, comprehensive waste, and environmental services company in North America. Waste Management was founded in 1971 and has currently about 44,000 employees. The company is the largest environmental solutions provider in North America, serving more than 20 million customers in the U.S., Canada and Puerto Rico. The company has a very good customer diversification, taking into account that its largest costumer represents only around 1% of annual revenues. It has the largest network of recycling facilities, transfer stations and landfills in the industry. Waste Management is also a renewable energy provider, by recovering the naturally occurring gas inside landfills to generate electricity. This process is called landfill-gas-to-energy and the company operates over 138 projects using this technology.

Waste Management's core business is solid waste, which was responsible for more than 95% of its revenues during the past three years. Within the solid waste business, its waste collection service accounts for more than 64% of its revenues. Waste collection involves picking up and transporting waste and recyclable materials from where it was generated to a transfer station, material recovery facility or disposal site. This business is very stable and offers very good earnings visibility over the medium-term because it is provided under service agreements, for commercial and industrial costumers and for most residential costumer services, for periods of three to six years. Moreover, its costumers' churn rate is relatively low and the typical customer stay with the company for 10 years on average.

The company faces intense competition from governmental, quasi-governmental and private sources practically in all parts of its operations. Its largest competitor is Republic Services (NYSE:RSG), with the two companies together handling more than half of all garbage collection in the United States. It also faces competition from regional and local companies, including companies that specialize in certain discrete areas of waste management. In its largest business of waste collection it faces fierce competition based on pricing and quality of service. To protect its market share, Waste Management has begun competing for business based on servicing offerings, investing in greener technologies and promoting other services that go beyond its core business of collecting and disposing of waste.

Growth Prospects & Financial Performance

The environmental sector offers good long-term growth prospects supported by a growing global population and an increase of urban populations in emerging countries, increasing therefore the demand for environmental services provided by these utilities. Even tough Waste Management has currently negligible exposure to emerging markets, it has purchased a 40% stake in a Chinese waste management joint-venture in 2011 showing it is aware that are better growth prospects abroad. However, until the company has meaningful operations in emerging markets it won't be exposed to these long-term global trends, being Suez Environnement a better way to play this theme. Therefore, Waste Management aims to grow through increased costumer retention, market share gains and selling more services to existing costumers.

Regarding its financial performance, Waste Management reported revenues of $13.65 billion in 2012, a 2% increase from the previous year. Its profitability is very good as Waste Management's EBITDA stood at $3.3 billion, or an EBITDA margin of 24.7%. In July 2012, the company announced a reorganization of its operations, designed to streamline its operations and reduce its cost structure, which should lead to higher profitability over the coming years. According to analysts' estimates, its EBITDA margin should improve about 1% over the next tow years to 25.7% in 2015. Despite its good operating performance, Waste Management's net profit declined by 15% to 817 million, negatively impacted by asset impairments and restructuring costs, and its earnings fell to $1.76 per share. During the first nine months of 2013, its revenues increased by 2.6% to $10.5 billion. Its net income was $703 million, an increase of 18% from the same period of 2012.


Waste Management has a quite good dividend history, given that is has increased its dividend for ten consecutive years. Since 2007 it has returned close to $7 billion to shareholders through dividends and share buybacks. Its last dividend increase was from $1.42 to $1.46 on an annualized basis, or an 2.8% increase. At its current stock price, Waste Management has a dividend yield of about 3.3% which is among the highest in the waste industry in the U.S. Its dividend payout ratio taking into account its trailing twelve months earnings is 68%, which is relatively high but still acceptable due to the company's stable business and good profitability.

Its dividend is also supported by its cash flow generation capacity. In the past three years, its cash flow from operating activities was stable at around $2.3 billion which was more than enough to finance its capital expenditures and dividend outflows during this period. Despite Waste Management's sound cash flow generation capacity, its cash flow visibility over the long-term could be better due to regulatory uncertainty. Given that the major component of the company's business is the collection and disposal of solid waste in an environmentally sound manner, a significant amount of its capital expenditures [capex] is related to federal, state, or local provisions that regulate the placement of materials into the environment. This adds an element of uncertainty to the company's cash flows and reduces its financial flexibility in the long haul. However, over the past few years its capex has been relatively stable between 9% and 11% of its revenues and should remain in this range if regulation does not change significantly.


The waste management business is relatively stable given its long-term relationship with customers enabling these companies to pay predictable and growing dividends over the long-term. Waste Management is one of the best options in the U.S., being the largest environmental solutions provider in North America and offers the highest dividend yield within its industry. However, it is not exposed to long-term global trends that offer better growth prospects for its European peers Veolia and Suez Environnement, thus it is only an alternative to these two companies if investors prefer a safer income stream.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.