Should You Throw Waste Management Out With the Trash?
Dr. Osman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Waste Management (NYSE: WM) is in the trash collection, disposal, and recycling business. Since consumers and corporations need to shed their garbage regardless of economic conditions, Waste Management is a relatively defensive stock. Thanks to its regular cash flows, the stock is one of the most consistent dividend payers. It supports a yield of above 4%.
Recent Moves
Recycling trash adds revenue streams from commodities of varying sorts and as such, the company’s results have suffered from lower commodity prices. Methane gas and recycled steel and other metals are examples. In addition, when times are tough, both businesses and individuals tend to throw out less. Waste Management’s Q3 results were less than stellar.
Revenue dropped 1.7% and net income fell 21.3%, the fifth straight quarter of declining income. The company is in a restructuring plan to lower costs but has no plans to cut back on its current efforts to invest in multiple clean-technology companies. On November 16 the company announced the acquisition of Cincinnati based coal recycler FlyAsh Direct. On the same day, Waste Management Canada officially opened the largest licensed private-sector recycling facility in Ontario.
Future Prospects
As the world continues to “go green”, Waste Management is increasing its investment in the recyclables sector. The company is already producing methane gas from its landfills. The company claims it currently produces enough electricity to supply 440,000 homes with plans to more than double that capacity by 2020.
While the advent of shale gas production from hydraulic fracturing and drilling technology flooded the market with supply and drove down prices, there is little doubt gas as a cleaner alternative to coal is gaining in popularity. Gas prices will not remain depressed forever and this will benefit Waste Management. In addition, falling demand for steel and other metals has hurt the company’s recycled metals revenue stream. Improvements in global economic demand, especially in China, also bode well for Waste Management’s future.
Waste Management vs. the Rest
Waste Management is the industry leader in the US with Republic Services (NYSE: RSG) its closest competitor. The table below compares some key metrics for the two along with smaller rival Waste Connection (NYSE: WCN).
|
Indicator |
Waste Management |
Republic Services |
Waste Connection |
|
Market Cap |
$15.11 bil |
$10.38 bil |
$4.04 bil |
|
Trailing P/E |
17.54 |
16.62 |
24.37 |
|
P/B Ratio |
2.4 |
1.33 |
2.16 |
|
Quarterly Earnings Growth |
-21.3% |
-21.1% |
6.6% |
|
Dividend Yield |
3.69 |
3.3% |
3.59% |
|
Debt/Equity |
151% |
91% |
54.1% |
|
Return on Equity |
14% |
8.29% |
9.5% |
There is no clear winner here on all metrics. A major attraction of this sector is the safe dividend yield and all three companies pay comparable dividends, although Waste Management leads the pack. Waste Management has also done the best by its shareholders of late with a respectable 14% ROE. The runt of this litter, Waste Management, is the lone company showing earnings growth in the last year and has the lowest Debt to Equity Ratio. Waste Management’s outsized debt to equity needs to be taken in the context of that company’s extensive acquisitions and expansions in recycling operations.
Foolish Summary
Although uber-rich investor Bill Gates continues to buy into Republic Services, another titan, Warren Buffet has gotten out of that stock. A review of news releases and company information would make it appear Waste Management is investing more heavily in the future prospects of recycling. I think Waste Management can be a good alternative to utility stocks. Or it can be added to dividend oriented portfolios to add more diversity.
ecofinstat has no positions in the stocks mentioned above. The Motley Fool owns shares of Waste Management. Motley Fool newsletter services recommend Republic Services and Waste Management. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!
