Hidden Risk Weighs Against Fat Dividend Yields – 4.4%, 3.4% -- at Dominant Waste Haulers
The Wall Street Journal’s Brent Arends smartly noticed a pair of seemingly unloved, high-yielding stocks last week in a column talking up Waste Management (WM) and Republic Services Group (RSG), which together dominate the trash industry in the U.S.
They’re paying nice dividends – Waste Management’s dividend yield at 4.4% and Republic’s at 3.3% -- and given their market positions and the inevitability of trash, well, those could seem payouts well protected on the downside, and perhaps they are.
The stocks aren’t cheap, but neither are they super pricey, as seen by PE ratio.
But Arends does delve into an important issue: no growth in revenue as the volume of actual trash disposed of has declined in the U.S. Manufacturers are using less packaging, consumers are re-using grocery bags, and little-by-little that overwhelming urge to reduce, re-use, recycle has gone from social movement to second nature for a lot of people.
What’s wrong with that? Well, the industry suffers from an actual glut of disposal capacity. Big, huge dumps with decades of space to fill. As volumes decline, one would expect at least a tiny but of price competition to eat into revenues further. But perhaps most worrisome, a fair amount of dump capacity is still in the hands of municipalities, and many of them desperately need the revenue they get from disposal fees. Orange County, Calif., Los Angeles County and others have been among the most aggressive price competitors in the disposal market at times, especially when the municipality was financially stressed.
Without dumps, waste haulers are just trucking companies, and margins can be terrible. But their huge investments in dumps over the past 20 years – the companies didn’t anticipate the glut, either, and most consumers still think there’s a shortage, which was never true – haven’t really paid off. And declining trash volumes, like fewer tenants for an apartment building, will make it harder still to boost margins. These are not stocks without a downside.
Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times.