Dumpster Diving for Investment Ideas

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

Living in a country with a waste disposal system that is as effective as America's is a blessing indeed. In 20 years of taking out the garbage, I've noticed that the same name is on practically every dumpster: Waste Management (NYSE: WM). Here are some key points from what I was able to learn about Waste Management.

How the money is made 

Until the third quarter of 2012 Waste Management's divided its segments on the basis of geographical location. As a result of restructuring, it currently has three reportable segments: solid waste, Wheelabrator, and other. The solid waste segment generates the vast majority of Waste Management's revenues. This segment's operations pertain to the collection, transfer, recycling, and disposal services that Waste Management provides for individuals, businesses and cities.

For Waste Management, the most profitable part of its solid waste business is collection, but there is more to this business than just collecting trash. After the garbage is collected it needs to be transferred, and then disposed of in a responsible manner. The solid waste segment is involved in all of these activities.   

Waste Management's Wheelabrator segment accounts for less than one-tenth of revenue, but some cool things are done in this segment. This segment creates energy by burning trash! Wheelabrator's waste-to-energy facilities turn waste into energy by burning it in specially engineered boilers. The resulting heat energy is then converted into high pressure steam which can be sold directly or converted into electricity. 

Revenues for Waste Management's "other" segment have been growing at an astounding rate, nearly quintupling in three years. Services provided by this segment include cleanup for oil drilling and coal mining operations, and brokerage of recyclable materials for third parties. This segment is growing like a weed, I'd keep my eye on it.

Trash titans

In its latest 10-K, Waste Management described the industry in America as consisting of two large national waste management companies, and an assortment of regional companies of varying sizes and degrees of financial strength. The other dominant player in America's waste management industry goes by the name of Republic Services (NYSE: RSG). Together these two companies handle the collection of over half of our nation's garbage. In 2008 Waste Management twice attempted an acquisition of Republic Services, only to be rejected both times. Here is how these two trash titans stack up in terms of operating cash flow: 

<table> <tbody> <tr> <td> </td> <td><strong>Waste Management</strong></td> <td><strong>Republic Services</strong></td> </tr> <tr> <td><strong>Operating Cash Flow (TTM)</strong></td> <td>$2.397 billion</td> <td>$1.599 billion</td> </tr> <tr> <td><strong>TTM OCF As a % of Market Cap</strong></td> <td>12.23%</td> <td>13%</td> </tr> <tr> <td><strong>OCF Average 2010-2012</strong></td> <td>$2.346 billion</td> <td>$1.571 billion</td> </tr> <tr> <td><strong>OCF Average 2007-2009</strong></td> <td>$2.459 billion</td> <td>$856.7 million</td> </tr> <tr> <td><strong>OCF Average 2004-2006</strong></td> <td>$2.383 billion</td> <td>$652 million</td> </tr> <tr> <td><strong>OCF Average 2001-2003</strong></td> <td>$2.145 billion</td> <td>$543.1 million</td> </tr> </tbody> </table>

Republic Services appears to have been the new kid on the block in the early 2000s, but since then has done some serious catching up. The rate at which Republic Services grew over the past decade, while spectacular, will be nearly impossible to duplicate. But that's nothing to worry about--Republic Services still trades at a reasonable level relative to its operating cash flow.

Waste Management has been solid as a rock. Its operating cash flow only dipped below two billion dollars, barely, in one year (2003) out of the past 13. This from a company worth just south of $20 billion.    

That dividend looks juicy

One thing many income investors will find attractive about Waste Management is its dividend. For a few years Waste Management's annual dividend was one cent. Fortunately for investors, in 2004 Waste Management began paying more respectable dividends. Distributions have been given in every quarter since 2004, and have not once been lowered since then. Let's take a look at the total dividends distributed by these two companies over the past few years.

<table> <tbody> <tr> <td> </td> <td><strong>Waste Management</strong></td> <td><strong>Republic Services</strong></td> </tr> <tr> <td><strong>Current Yield</strong></td> <td>3.5%</td> <td>2.7%</td> </tr> <tr> <td><strong>Payout Ratio (TTM)</strong></td> <td>82%</td> <td>61%</td> </tr> <tr> <td><strong>Dividends: 2010-2012</strong></td> <td>$1.899 billion</td> <td>$933.1 million</td> </tr> <tr> <td><strong>Dividends: 2007-2009</strong></td> <td>$1.595 billion</td> <td>$510.5 million</td> </tr> <tr> <td><strong>Dividends: 2004-2006</strong></td> <td>$1.357 billion</td> <td>$196.7 million</td> </tr> <tr> <td><strong>Past 9 years dividends as a % of current market cap</strong></td> <td>25.13%</td> <td>13.25%</td> </tr> </tbody> </table>

Both of these companies have fairly delectable dividends which have not been lowered in some time. However, Waste Management's large advantage in dividends paid over the past nine years relative to market cap leads me to give it the edge in terms of dividends, despite its higher payout ratio.

Final foolish thoughts

America's waste management industry is dominated by two large national companies who are very similar in many aspects. Their relative operating cash flow is similar, and they both have healthy, sustainable dividends. I give the slight edge to Waste Management for two reasons. It has a more attractive history of dividends, and its Wheelabrator business is one that I can truly be proud to own. But defensive investors can't really go wrong with either one of these companies. 

Waste Management has been a longtime favorite for dividend seekers everywhere, but the share price performance over the last few years has left many investors wanting. If you're wondering whether this dividend dynamo is a buy today, you should read The Motley Fool's premium analyst report on the company today. Just click here now for access.

Ryan Palmer has no position in any stocks mentioned. The Motley Fool recommends Republic Services and Waste Management. The Motley Fool owns shares of 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!

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