U.S. Ecology: Dividend Investing in Small Caps

| About: US Ecology, (ECOL)

Today’s entry in the best dividend stocks series is a small cap player that is serving up a nice yield. The company participates in the trash industry and has been a favorite of mine for awhile. I profiled this company last spring and in November of last year as well.

The company is US Ecology (NASDAQ:ECOL).

US Ecology is a small cap waste management company with a market cap of $314 million dollars. The company has been disposing of radioactive and hazardous waste for 60 years. US Ecology specializes in handling cleanups of disasters like the nuclear reactor problems occurring from the Japanese tsunami. US Ecology is headquartered in Idaho and has been around since 1952.

Everyone knows that the waste management industry is dominated by companies like Waste Management (NYSE:WM) and Republic Services (NYSE:RSG). US Ecology does not directly compete against these companies in the residential and commercial market. US Ecology has carved out its own niche for itself.

Governmental regulations have given the company a solid moat for such a small company. US Ecology cleans up waste from refineries, chemical production facilities, manufacturers, electric utilities, steel mills, medical and academic institutions. US Ecology owns one commercial nuclear waste disposal site and three different hazardous waste sites in the United States.

US Ecology Financials

Revenues have dipped the past three years, falling from a high of $176 million dollars in 2008 to $105 million last year. The company has suffered through two subpar years of lackluster earnings and profits. US Ecology has been able to maintain its dividend despite these challenges. Revenue is headed back in the right direction as the company is forecasting earnings of $130 million dollars this year and $145 million the next. Last quarter’s earnings report illustrates this improvement.

Revenue increased 67% to $39 million and earnings per share increased 71% to 25 cents. Net income increased to $4.5 million dollars and gross margins rose to 38%. The recent acquisition of Stablex in Canada added $5.5 million dollars to the company’s operating results. US Ecology has the ability to generate more free cash flow since the Stablex purchase which the company will need to pay down debt from the purchase and fund its dividend.

Pricing power is returning for American Ecology

Shares currently trade at 3.3 times book value, 3 times sales, and 21 times free cash flow. The stock trades at 25 times this year’s earnings and 16 times next year’s earnings. The good news is that growth has returned to US Ecology just as the economy is improving. The company is forecasting earnings between 75 and 85 cents per share.

The company is currently offering up a great dividend yield. US Ecology has a dividend yield of 4.2%. There is some risk involved with this stock. US Ecology pays a 72 cents dividend which is approximately 90% of conservative estimates for 2011 earnings. The company was able to fund its dividend last year despite the dividend exceeding earnings for 2010.

This is a company that I really like. I think that the company can surprise to the upside and shares look reasonably cheap to me at $17.

Disclosure: None