Companies in the municipal solid waste sector are well-known for their cash-flow generating prowess and relatively stable operating performance. As outlined in this waste industry primer, a trash-taker's residential collection operations are on a service-based model (not-volume based) and help to mitigate cyclical pressures in other economically-sensitive lines of their business (industrial roll-offs, etc.).
Further, cell-by-cell landfill development provides additional flexibility with respect to capital outlays, as rubbish handlers can scale back expenditures during troubled economic times, bolstering free cash flow. Such consistent, cash-rich business models have translated into a nice flow of dividends, particularly at the largest two domestic players, Waste Management (NYSE:WM) and Republic Services (NYSE:RSG).
[Click to enlarge]
With corporate bond yields at relatively unattractive levels compared to other asset classes and concerns about a double-dip recession coming back into vogue -- check out the recent ADP jobs report and ISM manufacturing index -- allocating a portion of your portfolio into a stable high-yielder in the waste sector seems like an attractive long-term option.
As the table above reveals, one can capture the best dividend yield with Waste Management, but likely participate in the greatest dividend growth via Waste Connections (NYSE:WCN), which recently initiated a quarterly payout. Investors should expect a dividend hike at Republic Services later this year and continued convergence to Waste Management's elevated payout ratio of nearly 70% over time. All three players are undervalued on a discounted cash-flow basis, with Republic offering the greatest opportunity for capital appreciation among the three, in my opinion.