This Investment Turns Garbage Into a 6.6% Dividend Yield

Sam Zell has amassed a $5 billion fortune over his 50-year investing career.
Zell, 75, is the leader in developing the publicly traded real estate investment trust (REIT). Zell has founded some of the largest publicly traded REITs, including Equity Residential (NYSE: EQR) and Equity LifeStyle Properties (NYSE: ELS).
For someone 75 years old, Zell certainly gets around. Then again, he gets around relative to someone half his age. To this day, Zell serves as board chairman of no fewer than five NYSE-traded companies.
Zell has a history of operating big, but one of his smaller investments should be a big attraction to income investors.
Covanta Holding Corp. (NYSE: CVA) is one of the five companies Zell serves as board chairman. Covanta, with a $2 billion market cap, is the smallest of the companies Zell chairs.
Smallest in market cap, but biggest in yield. The Covanta dividend yields 6.6%. This is highest among all of Zell’s publicly traded companies.
Covanta is no REIT. It provides waste and management services to municipal clients. Its core business is to own and operate infrastructure to generate energy from waste (EfW).
Helping municipalities rid themselves of waste accounts for 73% of Covanta’s $1.7 billion annual revenue. Selling the energy produced by burning the waste accounts for 18%. Additional revenue is generated from the sale of metals recovered during the process.
If you are an environmentalist, you’ll like the business. Covanta helps keep the planet a little cleaner. If you’re an investor, you’ll like the business. Covanta dominates the market. It accounts for 70% of the EfW industry in the United States.
More opportunities await abroad.
Covanta owns an equity interest in an EfW project in Italy. It owns an EfW project in Ireland. The Ireland facility is a $570 million investment that should generate roughly $60 million in annual EBITDA once up and running in 2018. Covanta is testing the waters in China.
The income to investors is certainly a draw, but there’s a catch at the moment.
The high-yield dividend is the product of a lower share price. Investors have fixated on Covanta’s earnings. Earnings have not only trended lower over the past two years, they have trended negatively.
I’m less fixated on earnings than most investors. Covanta’s earnings are bogged down with high depreciation charges, a non-cash expense. Covanta has invested heavily in its facilities in recent years.
On the cash-flow front, the news is more encouraging.
Covanta reported second-quarter EBITDA, a cash flow measure, of $93 million, which thumped the consensus estimate for $75 million. Management maintained its guidance for EBITDA of $400 million to $440 million. Free cash flow — cash left after the bills are paid — is expected to post between $100 million and $150 million.
Earnings might not cover the Covanta dividend, cash flow does. Cash pays the dividend. The dividend is comfortably safe.
Covanta has drawn more investor interest in recent months. Robert Baird, BMO Capital Markets, Barclays, and Stifel Nicolaus have all given Covanta a thumbs up. The share price has trended higher in response.
It’s nice when outsiders give a company a thumbs up. It’s even nicer when insiders give the company a thumbs up.
Covanta CEO Stephen Jones and two Covanta directors are major buyers. Jones used some of his own money to buy 10,000 Covanta shares; the directors used their personal accounts to buy 73,500 shares.
The Covanta dividend has never been lowered. To the contrary, Covanta  has raised it four times since 2012. The shares are still depressed, though, and depressed enough to trade at a 17% discount to where they traded two years ago.
You don’t tug on Superman’s cape; you don’t spit in the wind (a hat tip to Jim Croce). Giving his investing success, you probably shouldn’t bet against Sam Zell either.