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Waste Management Turns Trash into Energy

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Some investors prefer solid and conservative businesses with healthy dividend payments and a strong track record of financial performance, while others focus their attention on those companies that provide explosive opportunities for growth and innovation. Both kinds of investors could have important reasons to consider a position in Waste Management (NYSE: WM).

Conservative investors may want to focus their attention on Waste Management's position as the biggest trash collector in the United States. The company has important scale advantages due to its size, which helps at obtaining new contracts.  The business is quite stable and barriers to entry are considerable since it's not easy at all to obtain new landfills in the US.

The company pays a 4.1% dividend yield and those dividends have been rising consistently over the years.  Waste Management trades at a P/E ratio of 17.4, which is not excessive at all when compared to its closest competitor, Republic Services (NYSE: RSG), which carries a P/E ratio of 19.8 and pays 2.9% in dividends.

The following chart from the company's investors presentation shows dividend growth since 2004 for Waste Management:

<img src="/media/images/user_1532/dividends_large.png" />

So far Waste Management looks like a safe and even boring company, suitable for long-term investors looking to enjoy increasing dividend payments over the years. But this company is also involved in the very exciting business of converting trash into energy; the technology is already being implemented and it clearly has some very attractive potential.

Waste Management has 17 conversion plants that capture methane from decomposing garbage at 131 landfill facilities and turn it into electricity. The company converted nearly 7% of its trash into energy last year; and management estimates that if it were able to transform into energy 100% of the 92 million tons it hauled away in 2011, revenues could see an explosive increase from $12.3 billion to more than $40 billion.

Waste Management has minority investments in several companies involved in technologies for converting waste into different kinds of energy. Enerkem and Fulcrum are two businesses involved in converting waste into ethanol. Agilyx and Genomatica are developing systems to convert garbage into synthetic oil and chemicals, respectively.

Another source of potential growth for Waste Management comes from the returns it could obtain from these investments -- management recently stated in an interview with Bloomberg that at least three of this subsidiaries are planning to sell shares in public offerings, although dates for such offerings were not specified.

At first glance Waste Management looks like a stable and conservative investment, but a deeper look shows the extraordinary growth opportunities that come with the exciting business of converting trash into energy. Not many companies in the world offer such a combination between solidity and innovative potential.


Motley Fool newsletter services recommend Republic Services and Waste Management. The Motley Fool owns shares of Waste Management. acardenal has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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