Waste Management Stock Price: Overpriced Or A Cheap Buy?

Jun.26.12 | About: Waste Management, (WM)

In the past, Waste Management (NYSE:WM) has been a pretty popular company for dividend investors, and I'm sure plenty of investors holding the stock right now are enjoying the plump 4.39% dividend yield.

Unfortunately, compared to other stocks available for investors, I'm just not a fan, right now at least. In the last five or six years, we've seen the company slow down substantially, and use share repurchases to help their investors out. While that's great, it's a little too shaky for a buy recommend right now, especially with it's relatively high P/E ratio and EPS compared to plenty of other companies that are bargains.

For example, I've written before that Ford's stock price is likely one of the best (NYSE:F) deals of the coming decade for people looking for a riskier long-term dividend growth, and other growth/stable companies like Johnson & Johnson (NYSE:JNJ), Altria (NYSE:MO), and even an index fund like XLU provide better gradual dividend growth bets than WM right now.

This could change if there's a sudden price drop for WM or if the next year or so shows new (real) revenue growth, but until then, it's a solid "hold".

WM Is A Fairly Stagnant Company

Waste Management has essentially seen net income bounce up and down over the last five years, but it's all still fairly flat. This is during the same time that trash "production" and recycling demand have all grown.

This should obviously be an immediate problem to essentially every type of investor, whether you're looking for capital appreciation or are looking to enter a position for dividend growth.

It's especially true because while the dividend growth per share has gone up substantially, it's mostly been through share repurchases.

Don't get me wrong, share repurchases aren't inherently bad, and for tax purposes of avoiding double taxation, can be a great way to get rid of cash lying around without changing dividend expectations. I kind of wish Apple (NASDAQ:AAPL) had done this, for example.

But for people looking to grow dividend income, stock repurchases are more artificial boosts than signs of long-term income growth trends. They're unstable, unreliable, and can disappear in a sudden bear market. I'm not a fan overall.

This is why it's important to understand that, for the most part, WM is stagnant with very, very modest revenue and profit growth.

Is Waste Management a Hold?

This doesn't mean that WM should necessarily be a sell for investors who already have healthy dividends coming from the company. Right now it's a solid "hold", as the company's real revenues have finally started to increase to an extent. If prices take another plunge, it'll certainly be worth considering.

The dividend growth of 7-8% per year is nice, but since it's based on share repurchases, it's not a sign -- yet -- of actual sustainable growth that's enough to make me sit up and take notice. And that bothers me. With EPS at 2, and P/E at 16, there are more attractive companies out there that I think will see more growth both in new revenue and in dividend payment growth.

Still, the company is absolutely rock solid, and is a nice, boring, safe long-term company. I have no doubt that over the next several years they'll begin to see some real growth again with all of their business models. But until then, I'll be on the sidelines waiting patiently.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.