© Reuters. Waste management: Recession-resilient growth doesn’t come cheap
Waste Management (NYSE 🙂 is a recession-resilient company that has rewarded long-term shareholders by increasing the stock price and dividend per share.
The stock is near all-time highs and is currently up 33.7% year-to-date. The company provides environmental waste management services to residential, commercial, industrial and municipal customers in North America.
As of December 31, 2020, WM owned or operated 263 solid waste landfills, five secure hazardous waste landfills, 103 material recovery facilities (MRF) and 348 transfer stations.
We are neutral on waste management. (See Waste Management stock charts on TipRanks)
The size of the North American waste management market is expected to reach $ 229.3 billion by 2027, up from $ 208 billion in 2019.
Urbanization and industrialization are expected to create large amounts of waste, increasing the demand for smart waste management systems. Since waste management is a growing and recession-resistant industry, it is an attractive topic to invest in and is generally less volatile.
This is good news for risk averse investors, as the beta for Waste Management stock is 0.82, which means it is less volatile than.
Another advantage when it comes to investing in this industry is that these types of businesses often experience “natural monopolies”. Natural monopolies generally exist due to high barriers to entry. That’s why you probably still see the same company coming in to pick up your trash every week.
Stable and unspectacular dividends
WM’s current dividend yield is around 1.5%, which is by no means high. The dividend is however constantly increasing. Five years ago, its quarterly dividend was $ 0.41 per share, and now it’s $ 0.575 per share, a CAGR of 7%. This is also safe, since WM’s payout rate is 60.15%.
This dividend growth rate is low when combined with the low dividend yield of 1.5%. If its dividend were to keep growing at 7% per annum for the next 10 years, that would take your return on cost to 3% in 10 years, which is still low.
Therefore, WM is not the best value for a dividend investment. The yield has steadily declined over the years as the stock continues to rise.
There are a lot of things to love about WM. As stated earlier, high barriers to entry allow companies like WM to gain competitive advantages.
These competitive advantages are also proven by the numbers. For example, WM’s gross profit margins have steadily increased from 36.2% in 2011 to 39% today, indicating that the competition is not eating into its profits.
This stability comes at a high price, however. The company’s 12-month EV / FCF multiple is currently 31.4x. If the company can continue to grow over the next few years around 10%, it may be justified to keep the title.
However, its current valuation does not leave much room to outperform the market.
The Taking of Wall Street
When it comes to Wall Street, Waste Management has a consensus retention rating, based on three awarded purchases, four takes, and two sales in the past three months. The average WM price target of $ 153.44 suggests very little movement in the stock price over the next 12 months.
Waste Management is a good company that has treated its shareholders well over the long term and will likely continue to do so in the future.
However, there are probably better opportunities elsewhere.
Disclosure: At the time of publication, Stock Bros Research does not have a position in any of the titles mentioned in this article.
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