One Man’s Trash is Another Man’s Treasure

By Ryan Guenette - August 6, 2012 | Tickers: CWST, CLH, RSG, WCN, WM | 0 Comments

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When investing with a long-term spectrum, an investor may look for any number of characteristics in a company. Possibly the company is a trailblazer in finding a cure for a deadly disease. Maybe the company is perfectly positioned to take advantage of a long-term trend, such as healthy eating. All these companies will offer long-term growth, yet companies that provide necessities will preserve and nurture capital like no others.

One necessity that has been required by human beings since our beginning is waste collection and management. Waste Management Incorporated (NYSE: WM) is a domestic leader in waste management services. Even in the deepest of depressions and recessions, waste management is required, making the business immune to economic conditions. Waste Management is the largest player in the industry, having a value of $15.88 billion, and has provided investors with 35.73% gains over the past 10 years, all the while paying out a healthy dividend. So is this trash collection company just trash, or is it a diamond in the rough?

Stable Long-Term Growth

In 2009, Waste Management reported earnings per share of $2.01. In 2010, Waste Management stated that its earnings per share declined $0.03, to $1.98, representing -1.49% year over year earnings per share growth. A turnaround in the growth trend is seen sprouting in 2011, as Waste Management informed the street that its earnings per share reached $2.04, displaying 3.03% year over year earnings per share growth. Further growth is anticipated in 2012, as the average consensus believes Waste Management will derive $2.10 from its business, presenting 2.94% year over year earnings per share growth. A steep acceleration in Waste Management’s growth rate is expected in 2013, as the street sees Waste Management’s earnings per share growing 13.33%, to $2.38. Waste Management’s growth is by no means spectacular, it is stable and consistent. Americans are not going to suddenly begin making more waste, instead this is a long process related to the population. Simply put, the more people, the more trash. The chart below displays Waste Management’s sales, operating profit, net income, net margin, and operating margin over the coming years, as well as the population in Northern America, Waste Management’s target customers, over the forseeable future.

 A Strong Reason Why Not to Throw this Company Away

At the moment, the 10 year treasury rate sits at 1.51%, which does not even outpace inflation, which at the moment is around 1.70%. In theory, putting money in the 10 year treasury is throwing 0.19% of your money out the window, while staying in cash is technically throwing 1.70% of your money away. Currently, Waste Management pays out a dividend yielding 4.13%, or 2.43% taking inflation into account. Waste Management pays out a quarterly dividend of $0.36, or an annual dividend of $1.44. This dividend is up from 2011’s annual dividend of $1.36, and is expected to continue to flourish in the foreseeable future. In 2013, the street anticipates Waste Management’s annual dividend to be raised $0.02, to $1.46, representing 1.39% year over year dividend growth. Further growth is projected in 2014, as the street sees Waste Management’s dividend reaching $1.52, show-casing 4.11% year over year dividend growth. Waste Management’s dividend preserves capital against inflation, and also offers significant return on capital over the long-term. The chart below displays Waste Management’s earnings per share, dividend, and rate of dividend (the percentage of net income that is paid out in the dividend) over the coming years.

Who Wins the Race to Collect Your Garbage?

Compared to some of the most prominent waste management companies, such as: Casella Waste Systems Incorporated (NASDAQ: CWST), Waste Connections Incorporated (NYSE: WCN), Republic Services Incorporated (NYSE: RSG), and Clean Harbors Incorporated (NYSE: CLH), Waste Management compares relatively in-line.

In terms of growth, Waste Management is last in the industry, while Clean Harbors tops the charts. Waste Management has the highest dividend of the industry, yet is growing its dividend at the slowest pace of those who do pay dividends. In the fundamental ratio comparison, Waste Management is just above the average price to earnings ratio of 15. When growth is taken into account, Waste Management seems rather expensive, while Clean Harbors appears to be trading at a bargain. In the net profit margin comparison, Casella stands out to the downside, while Waste Systems tops the charts.

The Foolish Bottom Line

Humans will always produce trash, and this trash will always need to be collected. Waste Management fulfills this requirement, and offers incremental growth to its investors, enough growth to increase its dividend at meager rates. The Foolish bottom line is this: Waste Management is not going to outperform the market, but will outshine the 10 year treasury rate, and offer slight returns to its investors over the years, making Waste Management a treasure in the pile of trash.  

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