Not So Trashy: Waste Management Has 4.4% Dividend Yield, Upside When the Economy Improves
Years ago, Waste Management (WM) paid a why-bother, one-penny quarterly dividend. But then the company decided to get serious about its payout: after a series of increases, Waste Management’s robust 4.4% dividend yield now puts the garbage-handling concern right up there with many utilities.
Waste Management is the biggest player in its industry, with profit-enhancing economies of scale, a vast collection system, and hundreds of landfills that will likely grow in value as regulations limit new sites. Still, it’s sensitive to the economy: volume weakens as the economy slows, and the company loses pricing power with its customers. Lower commodity prices have taken a toll on income from the company’s recycling operation, and higher fuel costs don’t help if you operate a big fleet of garbage trucks. Also, while you might not think of electricity prices affecting garbage companies, Waste Management has waste-to-energy plants that sell electricity to utilities and other buyers, and falling energy prices have hurt that operation as well.
As a result of those trends, Waste’s profit margins have been under pressure, and most of its revenue growth is coming from acquisitions rather than internal growth. The Houston company’s been buying back shares during the down period.
But even so, the stock’s not been a very strong performer:
For dividend investors, the real question is whether Waste Management can keep on paying its dividend, which costs the company $164 million each quarter. Cash levels have declined lately, as has the company’s historically strong free cash flow. The dividend is now claiming more of Waste Management’s cash than it used to, but it remains well covered.
Waste Management is going through some changes – shedding its lowest-margin operations, buying its way into higher-yielding lines, and investing in new equipment – and its industry is stuck in a painfully slow recovery. Sooner or later, when the economy picks up, the company’s shares should cycle higher, offering a little something extra for dividend investors.
Worth remembering: Whenever we buy a stock for its dividend, we’re also acquiring the underlying shares, with whatever risks those carry. So it’s important to check out the fundamentals of any company you’re considering (YCharts can help with that) and to read through the 10-K as well.
Filed under: Company Analysis