Garbage is big business. It might seem silly, but it’s true. The industry might seem more appropriate for a segment on Dirty Jobs, but there’s serious money to be made from trash. In fact, one of the major industry players, Waste Management, Inc. (NYSE:WM), is a favorite among income investors for its market-beating yield.
After considerable rallies, Waste Management, Inc. (NYSE:WM) and close peer Republic Services, Inc. (NYSE:RSG) now trade at multi-year highs.
In that light, is there still time for investors to strike gold from garbage? Or are you better off tossing these stocks into the dumpster?
Waste Management, Inc. (NYSE:WM) and Republic Services, Inc. (NYSE:RSG) are both industrials, meaning they have lots of long-lived assets on the balance sheet. As is usually the case, lots of long-term assets are usually accompanied by a lot of long-term debt used to finance those assets.
At the same time, it’s not a great time to have a lot of debt on the balance sheet, particularly if that debt needs to be refinanced over time. Interest rates are on the rise, and I’m nervous about investing in companies with a lot of debt on their books.
To that end, at the end of the first quarter Waste Management, Inc. (NYSE:WM) had $9 billion in long-term debt on its balance sheet and just $6.7 billion in total shareholder’s equity. That means its long-term debt to equity ratio stands at a nauseating 134%.
Republic Services, Inc. (NYSE:RSG)’s long-term debt to equity ratio, meanwhile, sits at a better (but still uncomfortable) 91%.
Is growth a source of optimism?
Of course, high debt levels aren’t a huge cause for concern if the companies can grow at rates that make their interest expenses acceptable. Last year, Waste Management, Inc. (NYSE:WM) saw its revenues inch up 2% and its diluted earnings per share drop 14% from the year prior.
At the same time, Republic Services, Inc. (NYSE:RSG) reported a 1% drop in sales and flat diluted earnings per share in 2012, year over year.
Unfortunately, these growth figures aren’t exactly inspiring, and when you consider that each stock trades for more than 20 times trailing EPS, it’s looking more and more like these stocks are fully valued.
An international candidate to consider
An interesting alternative in the waste management industry is Veolia Environnement SA (ADR) (NYSE:VE). France-based Veolia Environnement SA (ADR) (NYSE:VE) does have exposure to the United States, a plus for investors reluctant to allocate capital to the shaky European economy.
Another huge plus for potential investors is the company’s gigantic dividend yield. Veolia Environnement SA (ADR) (NYSE:VE) pays an annual dividend, and according to Yahoo! Finance, 2013’s payout of $0.91 per share amounts to a greater-than 7.5% yield at recent prices.