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Waste Management (NYSE: WM) is a stock that has richly rewarded investors over a prolonged period. The stock was up 4% last year, which might not sound impressive, but it beat the S&P 500 index by almost five percentage points. Looking back further, in the past two years, Waste Management shares are up 30% – more than double the performance of the S&P 500 in the same period.
Waste Management seems to be a slow-and-steady type stock, but its returns are anything but. The reason is because Waste Management has a rock-solid business model with what Warren Buffett would call a wide economic moat.
Waste removal and recycling services might not be a sexy new idea, and Waste Management isn’t likely to get much hype in the financial media. But investors looking for steady profits, low volatility and a high dividend should consider this garbage stock to be a gold mine.
When Trash Is Treasure
Waste Management offers a number of waste management and environmental services to residential, commercial, industrial and municipal customers in North America. These services include collection, transfer, recycling and resource recovery, and disposal services. It is also a major operator in the development and operation of landfill gas-to-energy facilities in the United States.
One of the reasons Waste Management generates such strong returns is that its business model has a large economic moat, meaning it has high barriers to entry. It is not easy from an economic or regulatory standpoint to open a waste removal business. This means Waste Management does not have to worry about a startup competitor coming into the market with a new product and grabbing market share.
Waste Management’s stock price rally is accompanied by improving fundamentals. Its adjusted earnings grew 13% in fiscal year 2015, due to lower fuel expenses, significant cost cuts and the benefits of share repurchases. Full-year revenue of $13 billion was down 7% from the previous year, but that was due in part to foreign exchange.
Management expects 2016 to be another good year. 2016 fiscal year adjusted earnings per share are projected to rise to $2.74-$2.79 per share. At the midpoint that would represent 6% earnings growth for the year. That should be accomplished by continued growth in recycling and solid waste processing.
Fundamentals Support Dividend Growth
Waste Management’s steady profits allow the company to pay a significant dividend and raise its shareholder payout over time. For example, it raised its quarterly dividend on Feb. 26 to $0.41 per share. That’s a 6.4% increase over its previous dividend level of $0.385 per share. This is the 13th year in a row of increased dividends for Waste Management.
On an annualized basis, the new dividend will be $1.64 per share. The new dividend level represents a 2.9% yield, which is a higher yield than the S&P 500.
Waste Management also returns cash to shareholders through stock buybacks. Along with its dividend increase, the company announced a new $1 billion stock buyback authorization. That represents 4% of its market capitalization, which will provide a boost to earnings.
Waste Management is about as slow-and-steady as they come. But that’s not a bad thing – far from it. It’s a reliable company with high profitability, reliable growth, and a steady dividend.
Shares of Waste Management are not to be bought for excitement. However, investors looking for an above-average yield should give the stock a closer look.
Warren Buffett’s Big Secret
Warren Buffett didn’t become the world’s richest investor by accident. He did it by investing in a certain kind of stock. Few realize what separates this kind of stock from 99% of equities. But once you do, you’ll never invest the same way again. Discover Buffett’s big secret right here.