2023-07-21 17:11:20 ET
Summary
- Waste Management, Inc. has outperformed the market 2.5x since I last reviewed it 11 years ago, and its dividend has nearly quadrupled in 19 years.
- The company's dividend increases have been backed by increasing cash flow and earnings, with a comfortable payout ratio of 57% based on Free Cash Flow.
- Despite a high debt-to-equity ratio and a rich price-earnings/growth multiple, the company is expected to thrive due to increasing consumer awareness on environmental safety and recycling.
My last coverage on Waste Management, Inc. ( WM ) was more than 11 years ago. As I've mentioned in the past, one of the nice features on Seeking Alpha is the ability to track the performance of a stock since an article was published. I am taking no credit for writing something 11 years ago but the fact that this company has since outperformed the market 2.5x is almost unbelievable.
WM Since 2012 (Seekingalpha.com)
Company Background
Since I am writing about this company after a long time, a quick recap of the basics. Waste Management, Inc., in its own words is a "sustainable waste management and recycling services" company. The company was founded in 1968 and is the industry leader in its category.
The company had a revenue of nearly $20 billion in 2022, which was nearly 10% higher than 2021's revenue of $17.93, which was up nearly 20% from 2020's revenue. In a nod to the changing landscape, Waste Management rebranded into simply "WM" in February 2022.
How Did The Dividend Prediction Turn Out?
In my 2012 article, I had recommended that investors make use of a then pullback on the stock and had used the company's then high-yield and future dividend growth potential as the primary reasons. The table below shows the dividend extrapolation from my 2012 article with 2022's dividend predicted to be $2.54/share. Waste Management ended up paying $2.60/share in 2022 as shown in the 2nd image below. Again, I am not trying to take credit for this, but it highlights the reliability and predictability of this company. Collect trash, recycle, dispose, make money. Repeat.
WM Predicted DG in 2012 (Seekingalpha.com)
Although Seeking Alpha's tracker says Waste Management has increased dividends only for the last 3 consecutive years, the company's website says otherwise. Since paying an annual dividend of 75 cents in 2004, Waste Management has been paying increasing dividends every year with 2023 very likely to see a total of $2.80 being paid. In other words, the dividend has nearly quadrupled in 19 years.
How Does The Dividend Look Now?
Being the skeptic that I am, when a company's dividend has gone up to such an extent (almost quadrupled in this case), I worry if that is due to expanding payout ratios or through excessive borrowing. Let's see how Waste Management's dividend coverage looks based on Free Cash Flow ("FCF") and Earnings Per Share ("EPS)".
- Current shares outstanding: 406.82 million.
- Current quarterly dividend: 70 cents/share.
- Quarterly FCF needed to cover dividends: $284.7 million.
- Average quarterly FCF over the last 5 years: $501.16 million, which gives the company a comfortable payout ratio of 57%.
- Only two quarters in the last 5 years have produced a FCF that was less than the current dividend commitment and this underlines the strength of the company's dividend.
- Based on 2023's forward EPS estimate of $6.04/share, Waste Management has a payout ratio of 46%.
- Overall, both these numbers look fairly comfortable and shows that Waste Management's dividend increases have been on the back of increasing cash flow and earnings.
When it comes to debt, the company's debt to equity ratio of 2.26 worries me a bit. The company's debt level of $15 billion is the highest it has been in the last 15 years at least and this is not a good sign in the current high interest rate environment.
Overall, I believe the dividend is secure and provides more than satisfactory dividend growth. The yield is low due to the run-up in the stock price and not due to lack of dividend growth, which is a good problem to have. To conclude this section, I agree with Seeking Alpha's dividend grades below.
Technicals
From a technical perspective, the stock is in a sweet spot as it has not only taken out all the commonly used moving averages but is also not overbought based on its Relative Strength Index ("RSI") of 56. That leaves plenty of room to the upside technically, although I am not sure that is fundamentally backed as explained in the section below.
WM RSI (StockRSI.com)
Conclusion
I expect Waste Management and peers to thrive. This is one of the industries where I believe competitors have enough to feed on without eating each other's lunch. Why do I say so? Let's see some numbers :
- The US produces 268 million tons of waste each year.
- The average American throws 4.5 pounds of trash every day, which is almost three times the global average of 1.6 pounds.
- A typical family of 4 produces 6,570 pounds of trash annually.
In addition to the numbers, I'd argue that the average consumer's awareness of environmental safety and recycling has gone up significantly over the years and I expect this to continue as the Gen Zs and Gen Alphas age out. Overall, I expect this company and industry in general to thrive well into the future.
However, the company's outlook and stock's outlook are different. The stock is more than fairly valued at this price with a forward multiple of 28.50 and an expected earnings growth rate of 8.50%. That gives the stock a very rich price-earnings/growth ("PEG") multiple of 3.35. In a nutshell, Waste Management, the company, follows one of Peter Lynch's guidelines to pick stocks as the company is unfairly looked down upon. On the other hand, WM, the stock, has failed his favorite valuation metric with such a high PEG.
To conclude, I suggest readers not to invest new money into the stock here but if you are invested already, collect your dividends and stay put.
For further details see:
Waste Management: Turning Trash To Gold, But Pricey Here