The Best Garbage Dividends
Alvin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Instead of focusing on potential ten bagger stocks, which are usually very risky, investors would be better off looking for stable businesses. While this approach seems boring, there is actually a mathematical reason for the approach. As a simple example, say an investor loses half or 50% of his money while gambling on penny stocks. To break even, that investor would have to double his remaining money. This simple example illustrates why investors should focus on minimizing mistakes instead of looking for home-run stocks.
A good strategy to implement that helps to minimize mistakes is to build a portfolio on solid businesses with good dividend yields. A good place to start is the Waste Management Services industry. There are many good companies in this industry, but the top companies that pay dividends are Waste Management (NYSE: WM), Republic Services (NYSE: RSG), and Waste Connections (NYSE: WCN). These three companies earn most of their revenue from their collection businesses. In Q3, Waste Management, Republic Services, and Waste Connections earned, through their collection businesses, 61%, 77%, and 62.8% of their total revenue, respectively. Waste Management, Republic Services, and Waste Connections have around 20 million, 13 million, and 2 million customers, respectively. When it comes to dividend companies, cash is king. The following chart shows the free cash flow for the companies for the past 10 years.
As shown, with the exception of a few anomalies, the companies have consistently generated positive free cash flow. This consistency allows the companies to pay consistent dividends. The following chart shows dividend payments for the past 10 years.
As shown, Waste Management and Republic Services are consistent dividend payers. Waste Connections is a relatively new dividend payer, but with consistent positive free cash flow the company should have no problem sustaining its dividend.
Looking at recent earnings, the companies’ performances have varied. In the trailing twelve months (TTM), Waste Management, Republic Services, and Waste Connections have EPS (TTM over TTM) growth rates of -9.80%, 19.92%, and -5.7%, respectively. The following table sums up the three companies' Q3 2012 results.
|Q3 2012||Revenue (billions $)||Net Income (millions $)||Revenue Growth Year-Over-Year (%)||Net Income Growth Year-Over-Year (%)|
As shown, Waste Management and Republic Services experienced big declines in net income. Waste Management attributed the decline to lower recycling commodity prices. In the quarter, Waste Management reported that average recycling commodity prices declined by 40% year over year. While the majority of Waste Management’s revenue comes from its collection service, recycling accounts for around 10% of the company’s revenue. Similarly, Republic Services’ recycling revenue declined by 35% year over year. However, sale of recyclable materials only accounts for around 5% of the company’s revenue. Adding back unusual charges, Republic Services’ net income would have been down 14% year over year. Following the trend, Waste Connections experienced a 2.2% decline in intermodal, recycling and other revenue.
Looking forward, Waste Management sees improvement in prices. In its Q3 2012 earnings release, Waste Management's CEO David Steiner stated, “Recycling commodity prices and natural gas prices have stabilized recently, with recycling commodity prices actually up modestly in the last few weeks. Given our current outlook for relatively stable commodity prices for full-year 2013, we do not expect significant headwinds from commodity prices for the full year 2013.” When the economy recovers, the Waste Management Services Industry should also recover. In addition, over the long term, the US population growth should continue to provide business growth.
The Bottom Line
Currently, Waste Management, Republic Services, and Waste Connections have dividend yields of 4.4%, 3.3%, and 1.20%, respectively. While these yields are not the highest in the industry, they are stable and are based on solid business performances. Looking at the companies’ balance sheets, they are not good. Waste Management, Republic Services, and Waste Connections have total debt to equity ratios of 1.6, 0.9, and 0.6, respectively. Out of the three, Waste Connections has the best balance sheet. Regardless, the companies’ reliable positive free cash flows allow them to operate with more debt. In addition, the dividends are sustainable. Waste Management, Republic Services, and Waste Connections have (TTM) payout ratios of 75.6%, 51.7%, and 26.2%, respectively. Investors can use these stocks to get a continuous stream of dividend income. The dividends can then be reinvested in other dividend paying stocks. Waste Management, Republic Services, and Waste Connections are all worth a look.
iamgreatness 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!