Waste Management, Inc. (NYSE:WM)’s business of collecting and disposing of trash (as well as operating recycling plants) has allowed it to build a business with a $15 billion market cap, a generous 4.4% dividend yield, and a beta of 0.7 (indicating only a moderate correlation with market movements). Sales were up 3% in the second quarter, though the company wrote in its 10-Q that this growth was entirely caused by acquisitions. This was about the same performance as the first quarter of the year, as the numbers for the first half of 2012 come out to a 5% increase in revenue over the first half of 2011 but lower operating income, net income, and earnings per share. To help control costs going forward, Waste Management has announced a reorganization plan which will increase costs by about $50 million over the rest of 2012 due to severance-related payments, but will reduce expenses on management and support staff.
In the first six months of 2012, Waste Management, Inc. earned 82 cents per share and paid out 71 cents in dividends. Alternatively, of $1.1 billion in cash flow from operations the company used $900 million in investments (including acquisitions) and about $330 million on dividends, with issuances of debt helping to raise cash. It is good to see the company returning so much of its returns directly to shareholders, but we are worried that a dividend cut could be in the running if earnings numbers continue to come in lower. In the first half of 2011, the company paid 68 cents per share in dividends on 89 cents per share of net income, so the ratio of dividends paid to earnings has increased from .76 to .87 (note, however, that Waste Management, Inc. chose to increase its dividend over that period). The stock currently trades at 16 times trailing earnings and 13 times forward earnings estimates.
There were a number of insider sales at Waste Management earlier this year, but those sales came at prices in the neighborhood of $34.50- about 10% higher than the current price. In addition, insider sales often make sense as management diversifies their wealth away from the same company that pays their salary. Waste Management is also not closely followed by hedge funds; the largest position in the stock at the end of June, according to our database of 13F filings, was AQR Capital Management’s position of only about 350,000 shares. This is a small position compared to AQR (which is managed by Cliff Asness)’s other holdings.
The closest peers for Waste Management are fellow waste disposal companies Republic Services, Inc. (NYSE:RSG) and Waste Connections, Inc. (NYSE:WCN). Republic trades at about the same valuation as Waste Management in terms of its earnings: its trailing P/E is 15 and its forward P/E is 13. Republic Services is also a favorite of Cascade Investment. Cascade, which manages much of Bill Gates’s wealth, recently made an additional purchase of shares in the company (read more about Cascade’s buy). It seems about even with Waste Management in our mind. Waste Connections is more expensive, with a forward P/E of 19, and its business and dividend yield aren’t very impressive compared to Waste Management either. It seems to be the most overvalued of the three.
We also think that Waste Management’s P/E multiple and dividend yield make it attractive to income investors and so the stock could be considered in place of an investment in a utility. Dominion Resources, Inc. (NYSE:D) pays a 4% yield while Duke Energy Corp (NYSE:DUK) pays 4.7%. Both of these companies trade at 15 times forward earnings estimates, though they are larger than Waste Management at about $31 billion and $46 billion in market cap respectively.
Even with the risk that Waste Management would cut its dividend it matches up about even with leading utilities and could help diversify an income-based portfolio away from a dependence on the utility sector. It is also a better value than Waste Connections, and seems about even with Republic Services.