Summary
-Waste Management Inc. (WM) is the largest collector and disposer of trash in North America.
-Revenue and earnings have been flat for the past five years.
-Dividend yield is currently close to 3.6%.
-Overall, I can’t say that I am a buyer of this stock at the current price with a P/E of around 16, but it’s worth keeping an eye on as it has a great business model.
-A lot of sources that I’ve read out there recommend WM as a stock. If you’re one of them, please feel free to leave me a comment to clarify your investment thesis.
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Overview
Waste Management (WM) is the largest processor of waste in North America. With over 43,000 employees, WM collects 66 million tons of waste each year.
Waste Management has a rather unappealing business to most: they deal with trash. But from an economic perspective, their business model is enviable.
-Customers pay Waste Management to remove their waste.
-Waste Management recycles and gains some cash flow.
-Waste Management can use a combustion process to turn waste into energy- enough to power about 650,000 homes which provides another stream of cash flow.
-Waste Management deposits a lot of trash into landfills, and generates additional cash flow by charging fees for lesser waste companies to also deposit trash into their landfills.
-Waste Management uses the methane that comes up from landfills to produce electricity for which they can generate more cash flow. They generate about 500 Megawatts of electricity this way, which can power about 400,000 homes.
Revenue breakdown
Waste Management’s $11.791 billion in revenue for 2009 came from the following ways:
Collection accounted for $7.980 billion in revenue.
Landfill accounted for $2.547 billion in revenue.
Transfer accounted for $1.383 billion in revenue.
Wheelabrator (waste-to-energy) accounted for $841 million in revenue.
Recycling accounted for $741 million in revenue.
“Other” accounted for $245 million in revenue.
Intercompany accounted for ($1.946 billion) in revenue.
Collection
For commercial customers, WM typically makes a three year agreement and charges fees based on a variety of factors. They supply metal containers with their logo, and trash can usually be picked up by a truck with only one employee. For residential customers, WM typically makes a 1-5 year agreement with an organization like a municipality or homeowner’s association for exclusive collection rights in that area. They also charge some residents directly depending on location.
Landfill
WM operates 268 landfills. They deposit most of their collected trash into their own landfills, which keeps the profit margins high. WM charges fees for other trash collectors to deposit into their landfills. After a landfill is full they cover it with earth so it can be used for other purposes. WM also operates 5 hazardous waste landfills.
Transfer
WM uses transfer stations to compact trash and then send it to a landfill. In more urban areas, landfills may be far away from the pickup site, so WM and other garbage collection companies deposit trash into the transfer station. WM charges fees for their services to other collectors.
Wheelabrator
WM owns or operates 16 energy-to-waste facilities and 5 independent power production plants. WM burns solid waste to boil water to produce steam that produces electricity, which they can sell into wholesale electricity markets. Their facilities can process up to 21,000 tons of solid waste per day.
Recycling
WM recycles plastics and commodities from their collection activities.
Other
-WM manages the marketing recycled materials for third parties.
-WM provides sustainability services to businesses.
-WM collects methane from their landfills and sells it to produce electricity. The EPA recognizes this as a renewable energy source.
-WM offers solutions for healthcare waste.
-WM invests in companies that are supplementary to their own industry.
-WM rents out portable restrooms and provides some street-sweeping work.
Revenue, Earnings, Cash Flow, and Margins
Revenue, earnings, and cash flow have been lackluster for the last five years.
Revenue Growth
| Year | Revenue |
|---|---|
| 2009 | $11.8 billion |
| 2008 | $13.4 billion |
| 2007 | $13.3 billion |
| 2006 | $13.4 billion |
| 2005 | $13.1 billion |
| 2004 | $12.5 billion |
WM has had a slight decline in its revenue over the past five years. Even before their reduced revenues in 2009, in the period between 2004 and 2008, revenue grew by less than 2% annually.
EarningsGrowth
| Year | Earnings |
|---|---|
| 2009 | $994 million |
| 2008 | $1,087 million |
| 2007 | $1,163 million |
| 2006 | $1,149 million |
| 2005 | $1,182 million |
| 2004 | $939 million |
Earnings for 2009 ended only slightly higher than earnings for 2004. Earnings were rather static for the five years, even when the economy was strong.
Cash Flow Growth
| Year | Cash Flow |
|---|---|
| 2009 | $2.4 billion |
| 2008 | $2.6 billion |
| 2007 | $2.4 billion |
| 2006 | $2.5 billion |
| 2005 | $2.4 billion |
| 2004 | $2.2 billion |
Cash flow follows the same unimpressive trend as revenue and earnings.
Profit Margin
Net profit margin for Waste Management is between 8 and 9%. This is better than the net profit margin of a similar company, Republic Services, which is around 6%.
Dividend Growth
Based on the current dividend of $0.315 per share per quarter, WM has a dividend yield of a little under 3.6%. WM has had a regular dividend history since 2004 where they began raising their quarterly dividend each and every year.
Dividend Growth
| Year | Dividend |
|---|---|
| 2009 | $1.16 |
| 2008 | $1.08 |
| 2007 | $0.96 |
| 2006 | $0.88 |
| 2005 | $0.80 |
| 2004 | $0.75 |
Waste Management has grown annual dividends by 9% on average for the past 5 years. The dividend is well covered by free cash flows. Even the most recent dividend increase through these difficult times for the company from 2009 to 2010 was over 8%.
Share Repurchases
WM has avidly repurchased its own shares. During the four years of 2006, 2007, 2008, and 2009, WM repurchased about $3 billion of its own stock. The market cap of WM as of this writing is about $17 billion, so this is about 18% of the current market cap. Share repurchases drastically decreased in 2008 and 2009.
Balance Sheet
WM has a balance sheet that is not as clean as I would like. They have $8 billion in long-term debt and an interest coverage of only 4.3. The debt/equity ratio is 1.41, which is higher than I am willing to take in an investment like this. This is not to say the company is in danger. They have a predictable source of cash flow and have their large debt under control. They could reduce share repurchases and redirect cash towards debt if they felt it was in the best interest of shareholders. But this debt, in my opinion, reduces flexibility and options when it comes to long-term profit growth.
Investment Thesis
The average person disposes of 4.5 pounds of waste every day.
I view Waste Management as a conservative, low-growth dividend investment. The stock price is a bit expensive, it has a significant amount of debt, but the business model is great and the dividends are well-covered.
Waste Management is focusing on growing its recycling abilities. WM currently uses waste as an energy source to power 1 million homes. By 2020, they plan to double that number to 2 million homes. WM is currently constructing 10 new plants to produce 50 Megawatts of power.
WM currently recycles 8 million tons of material annually. By 2020, they plan to nearly triple that number to over 20 million tons. They have been making recycling easier for residents, and have also added new services like electronics recycling.
The business is additionally expanding its services in the following ways:
Healthcare Solutions- a branch to address the needs of healthcare waste
LampTracker- a branch to recycle the huge number of lightbulbs disposed of each year
Green Squad- a branch to help business identify operational savings through efficiency and waste reduction
At the current time I’m not a buyer. I’m not willing to pay a P/E of 16 for a company with slow growth and a lot of debt, even if I like the underlying business. I’m not saying this is a bad investment, or that the price will decrease, but simply that I don’t find the stock appealing at the moment.
EPS growth is being driven mainly by share repurchases. In the fourth quarter of 2010, the company spent nearly as much money on share repurchases as on dividends. I like companies that use their money to create shareholder value, but WM at this time does not impress me.
Risks
Waste Management’s core industry of trash is always going to be necessary, but WM does face risks anyway. They are susceptible to energy prices for powering their vast army of vehicles and operations. While they are in a conservative industry, they are still susceptible to economic weakness because trash output decreases during times of economic recession. Waste Management also faces risks in the form of contract losses to competitors if they don’t manage their business well. Nonetheless, they do have a strong, firmly entrenched business.
Conclusion and Valuation
Due to the relative expense of the stock and the modestly large amount of debt, I don’t consider Waste Management to be on the top of my buy list, but I do like the company, the industry, and the dividends. If interested in the stock, I would look for a lower entry price.
Full Disclosure: I do not own Waste Management stock at the time of this writing.
You can see my full list of individual holdings here.
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Great analysis…. I was looking into WM and Republic…. Great businesses because of the amount of trash we produce each day…. I am very surprised that both revenue and earnings have been so flat….
Same here. It’s a company I want to own but I just can’t justify the purchase at this time.
If I had a nickel for every time I came here.. Incredible writing.
Matt –
Also a stock I’d been looking at.
Another interesting point I found was that WM was indirectly affected by the housing/commercial busts. When construction was rampant, they derived a lot of sales through continual roll-off containers at construction sites.
Wasn’t there also a recent acquistion of a smaller firm?
While earnings might be flat, there has been some minimal share price gain not including reinvesting the dividend. I think for moderate to long term this is a winner. Waste disposal is not something that’s going away. Recycling is increasing in importance and will continue to add to their revenue stream. One of the more exciting aspects of this company is their energy production from waste burning and methane operations. American will only expand it’s use of alternative energy sources and energy from waste will only grow.