Republic Services: Bill Gates Loves It, And You Should, Too

Summary

• This series explores a portfolio comprised of my top defensive picks for a recessionary environment with a strong overall dividend growth profile.
• I examine Republic Services, Inc.'s management, current valuation, and dividend strength to determine whether it is a buy at current levels.
• Republic Services is a relatively low-risk waste management company with higher-than-average revenue and EPS growth.
• Although a recession could dampen its near-term growth, I view Republic Services as a core DGI holding and superior to its larger peer WM.

John M. Chase/iStock Unreleased via Getty Images

I maintain two 25-position, equal-weight dividend growth portfolios for my personal investing goals, one with an offensive orientation (my "Ultra High DGI" portfolio) and one with a defensive orientation (my "Defensive DGI" portfolio). Each portfolio has been painstakingly constructed and back-tested to maximize risk-adjusted returns and dividend growth based on its respective aim, with the defensive portfolio seeking to minimize drawdowns during difficult periods and thus be as "recession-proof" as possible, and the offensive portfolio seeking to maximize long-term dividend and capital growth. This article marks the third entry on the holdings of my Defensive DGI Portfolio.

RSG: Under-The-Radar Excellence

As the second-largest waste management company in the USA, Republic Services, Inc. (NYSE:RSG) maintains a large nationwide network of waste collection trucks, nearly 200 landfills, 72 recycling centers, and 74 renewable energy projects such as natural gas conversion facilities. It operates collection routes in a whopping 41 states and boasts Bill Gates as a major shareholder. Gates' investment vehicle Cascade has been buying up shares for over 20 years and now owns approximately one-third of the company.

Investor Presentation (Republic Services)

As I mentioned in my recent article on Republic's larger peer Waste Management (NYSE:WM), I like trash stocks because of their utility-like operations, their wide moats, and their resiliency against disruption by new technologies. Solid waste management is forecast to grow at a 3% CAGR globally from 2023-2035, so combining organic growth, rate increases, and margin improvement, these companies should have the ability to provide reliable mid-to-high single-digit dividend increases and capital appreciation for decades to come.

Performance in 2022 was quite strong, with RSG and its peers outperforming both the S&P 500 (SPY) and the Dow Industrial Average (DIA). On a longer 5-year timeline that includes the COVID flash crash, we can see that RSG has nearly doubled SPY's performance while also edging out WM and Waste Connections, Inc. (WCN) in total returns.

Data by YCharts

While I also have a buy rating on WM, I actually prefer RSG as an investment due to its stronger growth profile and industry-leading pricing initiatives. Originally founded as Republic Industries in 1981, the public company we know today was actually spun off from that entity in 1998 by its then-chairman Wayne Huizinga, whom investors may know as the founder of Waste Management. Republic's current CEO, Jon Vander Ark, is a former McKinsey consultant who has revolutionized the way they do business, finding new and novel ways to monetize various parts of the waste disposal process as well as raising prices for their collection and landfill services. Aggressive with acquiring smaller operators to expand Republic's footprint and diversify its operations, he recently led the RSG's $2.2B acquisition of U.S. Ecology, the leading hazardous waste disposal company with a 36% market share.

Investor Presentation (Republic Services)

As we can see above from RSG's latest investor presentation, their performance from 2019-2021 was stellar given the temporary revenue hit from COVID shutdowns, with EPS and FCF growth averaging 10-11% per year.

However, occasionally Republic's aggressive tactics have gotten them into hot water. Teamsters unions in major service areas like Las Vegas, San Diego, Orange County, and Seattle have staged well-publicized strikes over dangerous working conditions, low pay, and benefits over the past few years. However, in mid-2022 Republic was able to reach agreements with its employee unions to end those disputes.

Valuation

Currently, RSG appears just slightly overvalued by most traditional metrics. With a forward P/E ratio of around 26 times earnings and P/S ratio of 3.07x, it is not cheap but is generally in line with its 5-year historical values and those of its sector:

Morningstar

Looking at its growth metrics, however, I think we can see why the stock offers significant value at current levels. Although its valuation remains near its 5-year averages, both its recent and forward-looking growth is far higher than average. This year RSG's revenue and EPS grew nearly 20% each, with forward growth projected to remain between 12-13%. Despite a slight drop in 2020 revenue due to COVID, its 5-year average top line growth rate of 4.5% is actually still higher than its 10-year average annual growth rate due to this year's elevated performance.

Seeking Alpha

I'm not sure how long we can expect double-digit revenue growth to continue for RSG, and a recession would likely bring its growth rate down much closer to historical levels. But that doesn't change the fact that RSG is running on all cylinders at the moment and certainly deserves a premium valuation relative to its historical levels based on its strong growth outlook.

Dividend Strength

Although RSG's 1.56% yield isn't very impressive now that the Fed funds rate is projected to top out above 5%, one look at its dividend chart should give investors confidence of RSG's long-term wealth compounding potential:

RSG Payout History (dividendinvestor.com)

Discounting July 2020's lower dividend raise amidst COVID lockdowns, historical dividend figures show that RSG typically hikes its dividend by 8% each year, as it has done in 2021 and 2022.

Seeking Alpha

With manageable debt, projected annual revenue and EPS growth of over 12%, and a payout ratio of only 42% compared to its 5-year average of 47%, the company should easily be able to maintain an 8% dividend CAGR going forward and possibly even increase it, unless an extreme event such as a severe recession or another pandemic lockdown were to stall revenues again.

Conclusion

Republic Services, Inc. is my favorite kind of company: boring, consistent, and essential. Its CEO has brought a lot of innovation to both RSG and to the waste management industry as a whole, and its recent move into hazardous waste disposal should expand its already-wide competitive moat. It's no surprise that Bill Gates continues to increase his position in RSG considering its visionary leadership and strong growth outlook in a utility-like industry with only a few major players.

Data by YCharts

With Republic Services, Inc. shares currently down nearly 15% from recent highs as recession fears and rate hike uncertainty grip the market, I rate Republic Services, Inc. stock a solid buy on this dip based on its higher-than-average growth outlook and its resilient, innovative business model. Analysts may think the good news has all been priced in, but I don't think investors will regret siding with Bill Gates and owning this blue-chip trash stock Republic Services, Inc. for the long haul.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of RSG, WM, WCN either through stock ownership, options, or other derivatives. 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.

Comments

[Tail Dragger N72426]

I have been a garbage-pick-up customer of RSG and a stock holder for many years. Their service is great, as are their employees. Their rates seem to rise often, and when they do, I just look at my portfolio, and think "We're both making money, so please raise them some more".

[hugh74jones]

Sorry, I can't see RSG in comparison with others in the 100+ price range. Take PM for example, stable, well recommended, P/E is 18-1, whereas RSG P/E is 26-1 ---and PM pays 5 percent yield, whereas RSG a tiny 1.6% yield. Bill Gates has the money to lose a few investments, with hardly a scratch on his arm---most of the rest of us do not!

[user1416]

Bill also loves Waste Management to the tune of $11B... I like WM and WCN a little better right now, but all three have been great.

[Value Prof]

@user1416 Very true! And all three on large dips at the moment.

[Dividend Growth Fan]

$RSG looks extremely overvalued and provides no margin of safety buying it at the current price.

[Value Prof]

@No Fed Pivot Interesting take. At what price do you think would be a buy?

[Dividend Growth Fan]

@Value Prof I would start to get interested under $100.

[Value Prof]

@No Fed Pivot Sounds good! At $100 I think even Bill Gates would back up the truck.

[Desmater]

Added RSG to one of my portfolios. Picking 10 stocks for a 10 year horizon. I think it will do well, good management. I think with acquisitions they have a lot of room to grow.

[Value Prof]

@Desmater Agreed, I think that's a smart choice!

[xjerseyguy]

RSG is a stock I can never sell. Retired RSG employee, with very low cost shares from many years in the employee stock purchase plan. Looking forward to the dividend tomorrow.

Best company I ever worked for, and great co-workers!

[Clam Chowda]

@xjerseyguy turning trash into cash!

[Value Prof]

@xjerseyguy Great to know, and congrats on the low cost basis! I may be adding more soon on this dip.

[bluescorpion0]

Can't really get excited about 3% cagr growth in a 4-6% cagr inflation world.

[Value Prof]

@scorpionblue The 3%/yr growth forecast for solid waste management globally is adjusted for inflation (ie., the actual growth figure would be 3% plus inflation in today's dollars). RSG's forward long-term EPS CAGR forecast is 11%, while their 5-year total return CAGR is about 20%.

As we saw in 2022, inflation and higher interest rates put pressure on utilities in a number of ways, but customers typically bear the brunt of the cost via rate and fee increases, and most utilities have done quite well so far in this inflationary environment.

[bluescorpion0]

@Value Prof ah that sounds better. But isn't ROIC a bit low at 8%? Should one expect a return higher than 8% a year? I recall Charlie Munger said your ultimate return = ROIC over time.

[Value Prof]

@scorpionblue I think 8% a year return plus the dividend growth would be acceptable in this environment, but would note that RSG's 8% ROIC is second-highest in the trash sector and standard for utilities in general (ie., AWK, which in my opinion is the best water utility, has a similar ROIC, and most electric utilities are below 8%). I wouldn't put too much stock in the ROIC = return theory here, as WM's ROIC is quite a bit higher than the others but hasn't outperformed them over time. WM, WCN, and RSG usually track each other pretty closely.