Waste Management (NYSE: $WM) DD I wrote for a discord I’m in, /u/TheFondestComb, on May 2, 2021 at 2:08 am ,

When searching for a company to do a DD on this week for this Discord, I initially was struggling to land on a company. There are just so many dividend growth companies on my watchlist that I didn’t know where to start. Initially I was wanting to do a write up on HanesBrands, ticker $HBI, due to everyone needing underwear and socks but then I realized I hadn’t put on underwear since I got home from work on Friday, so I just couldn’t bring myself to break that streak to product test this company as thoroughly as I would have liked. However, this did lead me to throwing away some older underwear from the back of my drawer and having to race out to get them in the bin before the truck picked up this morning. Funnily enough, it was this little act that led me down the rabbit hole of America’s first, largest, and objectively best waste management company, $WM. This write up will attempt to go over some of the reasons I view $WM as a prime choice for any dividend growth investor who is seeking to add to their industrial holdings by buying a company worth holding for 20+ years, including some basic financial information, how WM can grow into the future, as well as some potential problems with the stock that I see. Finally I am not a financial advisor and this is written purely for the purpose of sharing some publicly available stock info in the form of a poorly written, weed induced WM DD, I hope you enjoy. The aptly named Waste Management, ticker symbol $WM, is an industrial sector powerhouse with first mover-advantage specializing in the waste management sub-sector that has been slowly and steadily raising its dividend over the last 18 years. Waste Management operates primarily with four different revenue streams consisting of waste collection, landfill operations, waste transportation, and finally, recycling. It is with these four primary sources of revenue that allow $WM to boast a current dividend yield of 1.68% with a yearly dividend of $2.30 paid out quarterly in March, June, September, and December. This dividend represents a payout ratio of only 53% which is not very high at all and is actually very sustainable. In fact, it has a dividend safety score of 98 from simplysafedividends.com and is over where management is aiming for their dividend to be (between 40-50% according to their 2020 Investors day presentation.) In addition to being very sustainable, a payout ratio of 53% also leaves room for growth, and $WM has been doing just that. While it’s 4 year average dividend yield is just slightly higher at 1.98% compared to todays at 1.68% the amount that yield represents has been growing at an average rate of 41.46% over the last 5 years, 28.24% over the last 3 years, and even in the shitstorm that was 2020, WM raised its dividend by 6.34% just showing that this company not only cares about it’s dividend growth, but that it can easily afford to raise its dividend as one important thing to note is that during the last 18 years (since 2004) of consistent dividend increases, the payout ratio has more or less remained unchanged, maintaining managements preferred 40-50% payout ratio with occasional outbreaks such as where we are currently due to a contagious outbreak that rocked the entire world. Finally, Waste Management has a Current Price of ≅ $138, an analyst price range of $125-$160, and an average analyst price target of $144 showing some room for this stock to still raise or fall to a better entry point if it does fall to test the lower analysts prediction. Moving on from the dividend and surface level stock price breakdowns, $WM has a current P/E ratio of 37.7 and I know this might seem very high, it actually isn’t when you compare it to other waste management companies. For instance, WM’s next three largest competitors are Republic Services, with a P/E of 35.2, Clean Harbor, with a P/E of 36.7, and Waste Connections, which has a huge P/E of 141.13 (this is the only one of the three that I went and checked multiple sites and yes, it really is that big…) As you can see, a P/E ratio in the low to mid 30’s basically comes with the territory of being in the waste management sub-sector. Just as the P/E ratio comes with the sub-sector; growth in the form of acquisitions will almost always bring some additional debt as its +1, and this is the next aspect of $WM’s balance sheet that I want to touch on. In 2019 Waste Management achieved a major milestone for any company, it officially made enough to fully pay down it’s yearly short term debt and pay off future long term debt, an achievement it had not completed since at least 2016 (and possibly before but this is the furthest back I could find regarding short term debt payments). Regardless, this is still an important feat as it shows that $WM is making enough money to support not only a growing dividend, but also additional amounts of debt to fund new acquisitions now and in the future. Now how can I make the claim that they can afford to take even more debt on? Well in 2020 (yeah the shitiest of shity years for businesses) $WM paid off all their short term debt and an additional $7.8 Billion in long term debt as well, just showing the strength of it’s balance sheet and how the acquisitions it’s made are paying off in time. Finally the last bit of financial digging I did resulted in me coming across something that did cause me to pause and I feel that any decent DD should include some potential negatives to put the positives into a better, more complete light. The elephant in the room in regards to Waste Management is it’s unusually high P/B ratio of 7.7ish. While this ratio is generally not as important in the industrial waste management compared to say the financial sector, it is still important to compare it to its peers. The same three competitors mentioned above all have lower P/B ratios than $WM. Ultimately this just means it is slightly overpriced compared to its book value, this can be explained away simply by the fact that in 2019, seeing that it could pay off all it’s short term debt, Waste Management added a large amount of debt to its balance sheet so that it could buy new acquisitions, one such acquisition was Advanced Disposal for 4.6 Billion. This higher P/B ratio also explains Morningstars 2 star rating. However my response to this information is just this: If you plan to buy and hold a stock for 20 years, isn’t it better to open your position early, accrue dividends and price appreciation, while buying dips, than to just wait for its P/B ratio to dip down to a level you’re more comfortable with? Especially considering that there is a very good chance that as the debt goes down as the acquisitions begin paying for themselves, so too will the P/B ratio fall. Moving on from financials and more towards hard assets, Waste Managements true strength starts to take form as it truly lives up to what one imagines from a company with first-mover advantage in its respective sub-sector. The company services over 20 million residential and 2 million commercial customers in 48 US States, Canada, DC, and Puerto Rico. $WM has a total of 293 active landfills with an average remaining lifespan of 22 years per landfill. They also have 346 waste transfer/consolidation stations, 146 recycling centers making it the largest recycling network in the nation , 16 waste to energy facilities that burn up to 23,000 pounds of trash to generate up to 670 MW/hour of electrical/steam energy, enough to power 660,000 homes. Waste Management also boasts 4 new Renewable Natural Gas (RNG) facilities that have already created more than 16 million gallons of RNG since coming online. This is enough RNG to power 1/3 of their 26,000 strong fleet and sell the remaining to local energy companies that then use the RNG to power roughly 460,000 homes. Finally every other landfill that WM owns and operates that isn’t a special waste-to-energy or RNG facility also has some more basic ways to capture the methane that comes naturally with decomposing trash and sells that to local gas-to-energy companies that use the supplied methane to help power an additional 180,000 homes per year, bringing the total number of homes powered by trash to a whopping 1.3 million and WM only plans to raise that number to over 2 million in the coming years. The last aspect of Waste Management that I want to discuss is their future growth prospects and why I am bullish on them as a company overall despite the higher than average P/B ratio the company currently has. Everyone creates waste and we all need that waste taken away somewhere so that we can live the normal lives we have become accustomed to. In addition to being the largest, the first, and objectively the best waste management company, $WM is also investing heavily into renewable energy by harnessing the naturally occurring methane and other RNG’s that are simply by-products of their primary business. In addition to selling the naturally produced energy that they found themselves having on their hands, $WM has also found a way to make money off of full and capped landfills by taking advantage of existing power lines that run to and from local electrical infrastructure turning them into solar farms and boosting the local power supply. Waste Management is also currently undergoing a change in it’s payment model, a shift away from a flat rate bundled model that didn’t take into account the costs of processing and holding the waste $WM picks up, and is changing to a fee-for-service model which will take into account everything from pick-up to transport, to recycling to even the costs it takes to turn that waste into energy. This move will essentially turn every action $WM takes into a way to make money. By providing such an essential service that no-one is exempt from needing, $WM has positioned itself amazingly to continue being the industry leader in waste management for decades to come. And that is no understatement, Waste Management has proven to be a very sticky company with a customer typically being a customer for 10+ years. The final aspect of $WM’s growth potential I want to dig up hits closer to home for me and those in Texas than others, and that is Waste Management basically has a monopoly in Texas. Yes there are competitors here, but between being headquartered in Houston which is the 4th largest city in the nation and rapidly growing, and having cornered the market in the new silicon valley cities of San Antonio and Austin, $WM can rest easily knowing they have future customers for years to come. Overall I am extremely bullish on Waste Management and see this as an investment to hold for the 25 to 30 years I have left until retirement and honestly, with $WM I might get to retirement early, and while investing in trash might not be a dirty job, as someone who grew up watch Mike Rowe, I think it’s only fitting that I make my portfolio get a little dirty to make money. submitted by /u/TheFondestComb [link] [comments], , Read More, r/StockMarket – Reddit’s Front Page of the Stock Market, r/StockMarket

Leave a Reply

Your email address will not be published. Required fields are marked *