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Digging Through the Trash for Income Opportunities: Waste Management, Inc. (WM)

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Waste Management, Inc. (NYSE:WM) is a prime example of a durable sector. Not only will human beings always continue to produce trash, but the amount of trash appears to be growing steadily. As such it is up to humanity to devise increasingly ingenious ways of dealing with this deluge of dirt. Stocks of companies active in this industry tend to trade defensively, enjoying low betas as well as high dividend yields. Waste Management, Inc. (NYSE:WM) is one of the largest American companies in the industry. While not as flashy a choice in the current bull market, the stock offers increased stability and reliable income.

Waste Management, Inc.Company at a Glance

Waste Management offers collection, transfer, recycling and disposal services to customers across North America, and operates a number of waste-to-energy and gas-to-energy facilities in the United States. Its recycling activities include material processing and electronic recycling, and recycling brokerage services. Additionally the company supplies sustainability services to businesses and organizations, and medical waste services for healthcare facilities. The stock enjoys a low beta of 0.64 and is more or less flat over the last 12 months, up 3.18%.

Investment Thesis

As mentioned above, waste management is a particularly durable industry. Companies active in this sector provide a more or less non-negotiable, essential service, and moreover one that appears to be becoming ever more necessary. Additionally, with its recycling and sustainability services, the company is well-positioned to benefit from the inevitable switch to more ecologically durable forms of harvesting energy.

The company is also doing well in terms of earnings; its EPS growth has outpaced the industry for the last five years. The company’s Q3 2012 report beat by a penny but growth seems to be slowing a bit this year as EPS was down 2 cents compared to the same period a year ago. Earnings in any case look a bit better than those of major US competitor Republic Services, Inc. (NYSE:RSG). After hitting it out of the park in Q2 2012, Republic missed in Q3 and Q4 of last year. Additionally EPS growth has lagged the industry slightly in the last few years.

One of the other major attractions of the industry, from an investor’s point of view at least, is the high dividend yield. Currently, Waste Management has a forward yield of 3.9%, and Republic’s is also quite high at 3%. Waste Management is growing dividends faster than the industry, but not as fast as Republic, averaging 12.7% per year compared to WM’s 8.1%. The payout ratio on WM’s dividend is quite high at 76%, Republic having a little more room to grow dividends than WM with a payout ratio of 59%.

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