However, investors have been bidding up the stock price (as we discussed earlier) and currently Waste Management, Inc. (NYSE:WM) trades at 22 times trailing earnings. The sell-side does expect some bottom-line growth over the next couple years, but still the forward P/E is 17 which seems rather high for a stable, almost utility like business. So from a value perspective the stock seems, if anything, overvalued. Waste Management does pay a generous dividend yield of 3.8% at current prices, making it a strong contender for an income portfolio; with the fairly low beta as well it could also make for a good defensive stock.
Waste Management’s peers, other than Republic Services, include Waste Connections, Inc. (NYSE:WCN), Progressive Waste Solutions Ltd (USA) (NYSE:BIN), and Covanta Holding Corporation (NYSE:CVA). The two highest dividend yields belong to Republic Services and Covanta, though each pays a lower yield than Waste Management does. Republic pays 2.9% to its shareholders, and its stock price also has a weak statistical relationship to the market with a beta of 0.6.
However it doesn’t seem that competitive compared to Waste Management and its own business has been struggling recently. Covanta, which operates energy-from-waste facilities, is actually valued at over 30 times analyst consensus for 2014; with its dividend yield also above 3%, but lower than what an investor would get as Waste Management, Inc. (NYSE:WM), we would avoid it.
Waste Connections and Progressive Waste Solutions are also priced for growth. In each case revenue was doing quite nicely in the company’s most recent quarter compared to the same period in the previous year; Waste Connections reported an 18% increase in sales, though its earnings actually fell modestly. While that stock has a quite low beta at 0.3, we have little confidence in its valuation and the dividend yield is nothing special. Progressive at least pays investors 2.6%, but this is lower than what we’ve seen at some of its peers. Of course as with these other companies the earnings multiples are high- trailing and forward P/Es of 26 and 18, respectively- and while Progressive has seen some growth on the top line we don’t think it is enough to justify the current valuation.
All five of these stocks post trailing P/E multiples of more than 20, suggesting that the market is expecting high earnings growth from the industry. Recently, however, financial performance has not been that strong and so we’d actually wonder if some of these stocks are good shorts. Some companies do pay good dividend yields, with Waste Management, Inc. (NYSE:WM) the highest among them, and if an income investor is interested in the industry that is probably the first stock to consider.
Disclosure: I own no shares of any stocks mentioned in this article.
