Covanta: Turning Trash Into Cash For Shareholders

Jul. 9.14 | About: Covanta Holding (CVA)

Summary

Rising dividend now represents 5% yield.

Several upcoming catalysts through new and renewed deals.

Strong contracted revenue provides safety.

Imagine owning stock in one of the largest waste collectors in the United States that pays a 5% growing dividend yield. That company, Covanta (NYSE:CVA), is the world leader in clean energy from waste, a growing field, that could turn your portfolio trash into treasure. Covanta owns and partners on 45 energy from waste facilities. Together, the facilities convert 20 million tons of waste to electricity. This is enough to power over 1 million homes. Covanta also recycles 440,000 tons of metal, which it sells as scrap.

One of the key selling points for Covanta may be its three prong approach to revenue and how its gets paid each step of the way. Covanta is paid for fuel, paid for energy, and paid for recycled materials. Here is a look at the company's three large segments:

· Waste Disposal: 62% of 2013 revenue

· Energy: 26% of 2013 revenue

· Metals: 5% of 2013 revenue

Over 75% of Covanta's revenue is contracted or hedged, providing a safety against fluctuating prices. The company has an average contract extension of 10 years, with many deals extended through 2020. The company's main customers are municipalities and utilities, providing a strong demand for its electricity product and scrap metal. Through the company's process of energy from waste, one ton of waste is turned into 500 to 650 kWh of power. That same ton produces 50 lbs of recycled metals, which are then sold. A low 10% of the original ton is ash that can not be converted to electricity and ends up in a landfill.

A new deal with the City of Boston will see 140,000 tons of solid waste shipped to a Massachusetts Covanta facility. The deal was set to begin on July 1st. The waste is expected to power 120,000 homes. Another deal in development with the city of Durham in Canada, will be fully operational by late 2014. The 20 year contract will turn 140,000 tons of waste into power.

Of course, the company's large New York deal is one of the focuses going forward. That deal is expected to start in 2015. The 20 year agreement centers around the regions of Queens and Manhattan. An estimated 800,000 tons of waste will be converted to electricity, in one of Covanta's largest deals. The deal has an estimated value of $2.8 billion.

Going forward, Covanta's Dublin deal continues to be a possible bright spot, once approved and constructed. During the first quarter, Covanta updated on the project and said it continues to pursue the commencement of construction of the project. The deal is expected to convert 600,000 tons of waste per year into power for over 50,000 homes.

In June, Covanta announced new initiatives that will provide stronger adjusted EBITDA. The items, which include workforce reductions, are expected to add $30 million to adjusted EBITDA.

Covanta generates strong cash flow from its reliable business and mostly contracted deals. The company turns that cash into dividends for shareholders. The company has raised its quarterly dividend to $0.25 for the third quarter, representing a raise of 39% from its prior 2014 payout amount. This continues a string of dividend raises each year that now have the stock yielding around 5% on its current $20 share price. Here is a look at the quarterly dividends paid:

· 2011: $0.075 x4

· 2012: $0.15 x4

· 2013: $0.165 x4

· 2014: $0.18 x2, $0.25 x2

The recent first quarter saw strong revenue and earnings. Total revenue of $401 million was 7.5% higher than the prior year and beat most analysts' targets by $20 million. The company reported a loss of $0.03 per share, which also came in higher than most analysts projected. For the full year, the company is not guiding on revenue, but does have a targeted earnings per share range of $0.35 to $0.50. In 2013, Covanta sold 5.4 million mWh of power. That number is seen rising to the 5.5 to 5.7 million range in fiscal 2014. By 2018, the company estimates it will sell 6.6 million mWh of power.

Analysts on Yahoo Finance are projecting revenue to fall marginally to $1.6 billion for fiscal 2014. Earnings per share are expected to come in at $0.44 for fiscal 2014. For fiscal 2015, analysts see revenue growing only 2.2%. Earnings per share are expected to come in at $0.61. With the upcoming developments and strong prices, Covanta could easily beat analysts' projections for 2015.

Shares of Covanta are up 15% in 2014 after rebounding sharply from a bottom seen at the start of the year. However, in the last 52 weeks, shares are up only 2%. Covanta will report second quarter earnings on July 23rd. I believe the company will again beat expectations, with strong growth in pricing and contracted revenue. An update on New York and Dublin could also prove to be a catalyst during the call. Investors will want to consider buying before earnings on this one.

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