Waste Management (NYSE:WM) is the largest provider of complete waste management services in North America. The company offers waste disposal and collection services as well as complete hazardous waste disposal and recycling. Moreover, Waste Management is a leading player in the area of landfill gas-to-energy and waste-to-energy development. It possesses and manages 271 landfill sites. The company also possesses 287 transfer stations which consolidate, sort, compact and transport waste.
The main contributor to the company is still the trash collection business. However, the company is expanding its energy business, and it hopes to double the capacity by 2020. Trash management business generates roughly $8.5 billion in revenues each year. In addition, the business generates significant revenues from landfills and energy segments.
Landfills are a lucrative asset:
While trash collection generates the largest amount of revenues, the real money comes from the ownership side. It is not the ownership of the trash itself, but of the land used to store it. Holders of landfills that can accommodate large amounts of trash have an advantage in the waste dumping business. It is an advantage that lets these companies amass healthy returns on what people throw out every day. Not only does holding the landfills save Waste Management money, it yields a lot of revenue from other providers using its landfills. Five of Waste Management's 271 landfills are dedicated for the dumping of hazardous material.
In the previous year, landfills generated revenues of $2.6 billion, which was the second largest component of total revenues after the collection segment. While collection and landfill operations generate the most revenue and a lot of cash flow, recycling and transfer also remain important segments of the business. Recycling operations offer communities and industries with a substitute to conventional garbage collection and landfill disposal.
Overall, the waste management is a necessity which cannot be neglected. In the United States alone, more than 250 million tons of trash is created every year, and more than half of this waste ends up in landfills. The landfill industry was extremely supple during the recent financial crises. While revenue growth was hindered through the slump, companies were still able to generate strong cash flow and defend their dividends.
Waste to Energy:
Wheelabrator Technologies Inc. is a subsidiary of WM focused on generating energy from waste. Wheelabrator has 17 facilities with a combined processing capacity of 23,000 tons of solid waste every day and generate 669 megawatts. In addition, the firm has five independent power plants, which have the capacity to generate 227 megawatts of energy on a daily basis. At the moment, the waste to energy segment contributes $877 million to total revenues. However, thanks to increased focus on the clean energy, I expect the revenues from this segment to move higher in upcoming years.
As the focus is increasing towards the eco-friendly disposal of waste, the market for energy from waste will increase. WM has already initiated plans to increase the energy generation from its waste to energy facilities to prepare for this scenario.
WM has a solid history of dividends and currently offers a dividend yield of 4.20%. The company pays an annual dividend of $1.42. WM has been raising its quarterly dividends on a consistent basis since it started paying dividends. One can expect another dividend increase soon, taking into account the history of dividends and healthy operations. The firm is generating healthy cash flows and solid revenues. I expect the cash dividends to continue and further increase in the next year.
Waste Management is the principal operator in the market, and it's closest two competitors together are smaller than WM on the basis of market capitalization. Republic Services (NYSE:RSG) is the main competitor for WM, and it lately acquired Allied Waste to battle with WM and to make a level playing field. Waste Connections, Inc. (NYSE:WCN) just announced that it will buy R360 for $1.3 billion.
Another player, Heckmann Corporation (HEK) is also establishing a stronger position in the field. After announcing a merger with Power Fuels, Heckmann has also acquired a majority stake in Appalachian Water Services, LLC ("AWS").
Even though, there has been considerable movement in the industry, WM competitors still remains significantly behind in terms of market share and pricing power.
Waste Management has a strong foothold in the industry and the revenues have been growing. Due to regulatory requirements and high costs to acquire landfills, the entry barriers are quite high in the industry. The existence of high barriers makes it difficult for the new players to enter and stay in the market. WM is not a high-growth stock, and it will not make anyone rich overnight. However, the long term prospects of the company are extremely bright. Solid operations and impressive revenue growth make this stock an ideal long term investment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.