Waste Management, Inc. (WM): An Excellent Moat and 13 Years of Consecutive Dividend Increases

Besides payout ratios, it is important to assess how well a stock performed during the financial crisis. A “safe” payout ratio can suddenly appear dangerous if earnings are very sensitive to the broader economy.

Fortunately for WM, consumers and businesses still have to consume a variety of goods regardless of how the economy is doing. Trash is a hard expense to avoid. WM’s sales fell by 12% in 2009, reflecting lower trash volumes but still outperforming many other types of companies.

Importantly, WM’s stock actually gained 5% in 2008, beating the S&P 500 by 42% and reflecting its defensive characteristics.

Source: Simply Safe Dividends

Analyzing a company’s return on invested capital can help us understand whether or not it has a moat. As seen below, WM has consistently recorded high-single digit returns. In many ways, WM’s business is somewhat like a utility company in that it practically has a monopoly in many local markets due to its landfills and extensive asset network. Since it is so capital intensive, the result is moderate but predictable returns on capital.

Source: Simply Safe Dividends

WM has also been an excellent free cash flow generator. Free cash flow is the lifeblood of companies and allows them to reinvest and return capital to shareholders without requiring debt or issuing shares. WM is a free cash flow machine because of its long-lasting assets (e.g. landfills, truck fleets), customer contracts, and route density.

Source: Simply Safe Dividends

A company’s balance sheet can also impact the safety of a dividend payment. Companies with too much debt could unexpectedly fall on hard times and need to suspend their dividend in order to service their debt.

WM maintains significantly more debt than the average company. Its assets are capital-intensive, but the company’s consistent free cash flow generation reduces its credit risk significantly. WM also has over $1.4 billion in unused and available credit capacity, and the company has noted that only 8% of its total debt portfolio has floating interest rates in case rates finally do start to rise.

Source: Simply Safe Dividends