I live in a rural community in Southern Delaware. Several months ago Waste Management (NYSE:WM) bought out my local trash collector. The local company was sold because Delaware recently enacted a law which mandates the recycling of plastic, paper and metals. The local business was not equipped to handle recycling so the owner decided to sell out rather than make the capital investment required by law.
WM on the other hand was already equipped and ready to do the recycling. The law created an opportunity for WM to become larger at the expense of this smaller business. It soon delivered another container to my house with instructions on what to do with the new green container. Now I have 2 containers, one for trash and another for recyclables. WM makes it convenient for customers by allowing one to place plastics, papers and metals into just one container. There is no need to keep them in separate containers.
New mandates like this put WM in a great position to grow and enlarge the business. As communities and states enforce recycling, it creates new markets for the services that WM provides. WM has been providing these services for years and doing it profitably. WM is the largest waste disposal company in North America. It also owns waste-to-energy facilities along with 98 recycling plants. S&P reports that WM's services generate a strong cash flow that it uses primarily for acquisitions, dividends and share buybacks.
WM is implementing a restructuring plan that will reduce the number of corporate office regions to 17 from 22. S&P expects that this restructuring will improve ROIC about 75 basis points each year over the next 5 years. WM is also converting its trucks to natural gas vehicles to reduce costs. Some of the gas will be extracted from its own landfill gas projects. WM sees a strong acquisition pipeline which includes solid waste deals that tuck in nicely with its present business and is also considering purchasing some profitable medical waste operations.
Dividends have been paid since 1998. The dividend was raised from $.34 per share to $.355 per share in March of this year. At $34.00 per share this represents a 4% dividend. For a company that provides services that require a large capital base and offer specialized services that are hard to duplicate, it is difficult to understand the rather low valuation of the company. The answer lies in the fact that WM has not been increasing its profits over the past 5 years. Cash flow and profits per share have remained stagnant. For this reason all the research recommendations listed on Yahoo are at hold or lower. S&P on the other hand has put a 4 star rating on the company because it believes the new initiatives listed above will increase the profitability of the company over the next several years.
WM offers important services that people need in good times and bad. If business picks up, so will the profits of WM. If business remains the same or gets worse, WM will still be generating enough cash flow to pay the present dividend. So good times or bad, WM represents a solid investment with a reasonable return on one's investment.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in WM over 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.