Dumpster Diving For Dividends

Investing In The Waste Disposal Business

 

Sometimes the least exciting businesses are the ones that can offer the most steady and reliable cash flows and profits which often translates into dependable dividend payments. We all know the saying “One man’s trash is another man’s treasure” and that may be the case when examining the waste industry for potential dividend payers to add to our portfolios. While experiencing modest growth in the U.S. the waste industry is estimated to be worth about $55 billion in annual sales. One unique feature of the waste industry is that all humans require their services as virtually no alternatives for garbage disposal exist. As dividend growth investors we are constantly looking for solid dividend income plays from companies that offer ‘must have’ products or services, otherwise known as staples, while operating within a wide enough moat to potentially stifle any new competition that may arise. The waste disposal business showcases both the imperative and wide moat nature of this sector. It comes as no surprise then that this industry is a staple among many wealthy investors. In fact, Bill Gates, directly and indirectly through his venture arm Cascade Investments, owns a sizable stake in two of the largest players in the space, Waste Management, Inc. (WM) and Republic Services, Inc. (RSG) owning approximately 4% and 25% of each company respectively. With that being said, let’s take an overview of some the of popular dividend paying stocks in the waste disposal business.

 

 

Starting out with one of the largest names in the U.S. disposal business is Waste Management, Inc. (WM). Headquartered in Houston, TX, WM currently yields a very reasonable 2.75% with a moderately high payout ratio of 59.8% based on an EPS of 0.23. Having a pretty decent record of raising dividends going back eleven years, WM sports a pretty decent ten year annualized dividend growth rate as well at 7.15%. From a valuation perspective, WM has a current PE of 19.5 with a similar forward PE around 20.0. While not cheap relative to the market the current PE falls way below WM’s five year average. Of course, as mentioned earlier, having Bill Gates as such a large shareholder in this company doesn’t hurt either.

 

The other big name in the waste disposal space is Republic Services, Inc. (RSG). Based in Phoenix, AZ, RSG is yielding a decent 2.76% with a moderate payout ratio of just 51.5% ensuring a safe dividend based on an EPS of 1.53. In terms of dividend growth, RSG is no slouch as its ten year annualized dividend growth rate has been a very healthy 16.23%. Pretty impressive for such a boring industry that isn’t known for it’s stellar growth. Looking at the current valuation of RSG, the PE is higher than the market as a whole standing at 26.6. Forward PE looks a little more enticing at 18.6 and with Bill Gates owning approximately 25% of the company you just know his disclosure regarding this stock will impact pricing one way or another.

 

Moving on to some of the smaller waste disposal dividend players is Waste Connections Inc. (WCN). Headquartered in The Woodlands, TX, WCN offers a relatively low yield of 1.11% with a very low payout ratio of 24.4% based on an EPS of 1.86. By current cash flow standards this dividend is safe with room to grow. While having a relatively short dividend distribution history the growth has been nonetheless very impressive jumping from $0.075 per quarter in 2011 to $0.13 per quarter today representing a 73% increase in just four years. The current PE of WCN stands at 25.1 which is in line with its five year average. The forward PE looks more enticing at 19.4 suggesting a run up in share price in recent weeks.

 

Another of the smaller companies in the disposal sector is Progressive Waste Solutions Ltd. (BIN), with a very appropriate ticker symbol I might add. Headquartered in Vaughan, Canada, BIN has operations in both the United States and Canada. This stock currently offers a relatively low yield of 1.83% with a moderate payout ratio of 48.9% based on an EPS of 1.56. With a current PE of 22.3 and a forward PE of just 14.4 one might want to wait a bit before pulling the trigger on this one.

 

Finally, we’ll take a look at US Ecology, Inc. (ECOL). Operating out of Boise, ID, ECOL offers us another relatively low yield of 1.55% with a moderately low payout ratio of 36.4% on an EPS of 1.84. From a valuation perspective, ECOL has a current PE of 25.2 which is higher than its five year average of 21.0. Forward PE looks a little more reasonable at 20.1.

 

Clearly, one has several options when looking to invest in the waste disposal business from a dividend perspective. From the overview above two clear large standouts emerge as the proverbial ‘big dogs’ in the sector, Waste Management, Inc. and Republic Services, Inc. In fact, WM and RSG account for approximately 39% of total industry revenue with the rest being divided among private sector companies and municipalities. The smaller names might also be considered in the sector, however with shorter dividend histories and yields that are less attractive than the large players I doubt they’d garner much interest from many dividend-centric investors.

 

Have you ever considered investing in any waste disposal dividend paying companies? Please let me know below.

 

Disclosure: Long NONE

Image courtesy of: Sira Anamwong at FreeDigitalPhotos.net

44 thoughts on “Dumpster Diving For Dividends

  1. I remember looking at WM, but ultimately never pulled the trigger. I think it’s a great sector, just not sure about being invested in it quite yet. This serves as a good reminder though, especially since I like owning shares of companies that provide things people cannot or would not live without.

    – HMB
    HMB recently posted…Stuffing MoneyBags – January ’15My Profile

    • Hi HMB,

      Like you, I too like to invest in ‘must have’ companies that offer products or services that are necessary for day to day functions and like you I still have not pulled the trigger on any company in this space. A while back I did consider WM and RSG but went with other dividend paying stocks instead. I still think this is an interesting sector to consider because of its stability and wide moat nature. Thank you for stopping by and commenting.

  2. DH…

    Nice article. I’ve also been looking at these companies because I too like companies that produce goods and services that everyone has to have but thinks very little about it. Like you say, they’re not very sexy but they are consistent, lucrative and growing. I even lean toward Waste Connections but I don’t own any yet. I wish you the best.

    Respectfully,
    Dennis McCain
    dennismccain.weebly.com

    • Hi DMC,

      Thanks for stopping by and sharing your opinion regarding this sector. Sometimes the best companies to invest in are the least sexy and fly under the radar. They always tend to be safe, stable and reliable in terms of earnings and dividend payments. The garbage industry certainly meets those standards. As always, I appreciate your comment.

  3. Thanks for the list, DivHut. I looked at the industry and the metrics a few months and decided to pass on them. It sound like a lucrative investment as you’ve pointed out – everyone needs someone to take their garbage away. I didnt realize that Bill Gates was such a big shareholder of RSG. Thanks for pointing it out.

    Have a great wknd
    R2R
    Roadmap2Retire recently posted…Chatter Around the World – 84My Profile

    • Hi R2R.

      Based on the comments so far the garbage disposal sector seems to pique the interest of many dividend investors but few have pulled the trigger on any of the names listed. As you noted, Bill Gates certainly believes in this space and I too was surprised to learn that he is such a large shareholder of RSG. I know Warren Buffett also held shares with Bill Gates in the past but has since sold his position. It’s definitely a sector that all consumers and industries rely upon, however doesn’t seem to be wildly popular among dividend investors. Thanks for sharing your comment.

    • Hi FerdiS,

      Thank you for the kind words and your continued support. I think the RSG dividend is still pretty safe with room to grow despite its current payout ratio. It isn’t all that high based on current cash flow though. Glad you enjoy my theme based articles. As always, I appreciate the comment.

    • Hi TBDI,

      Well, typically premiums are paid for well run businesses that have a history of being stellar. While the waste disposal business definitely has some of the likenesses of utilities they still need to be run and managed profitably to command those premiums. The current PE of WM and forward PE make it much more reasonable than in the past and still might be worth a look. Thank you for stopping by and commenting.

    • Hi MDP,

      Finally a comment from a dividend investor that actually owns a piece of the waste disposal sector. Happy to hear that you have bought into a pretty stable sector that offers some pretty decent yield too. WM stock has definitely been on a tear the last few years and has a pretty impressive chart too. Sometimes it seems difficult to catch quality names on the downside and it feels like you are always buying on the upside. Curious to know why you chose WM over RSG. I appreciate you stopping by and sharing your WM holding with us.

  4. Great article DivHut. I’ve been interested in this space for some time. I’d like to own some Waste Management (WM). They seem to have pretty large footprint. Being a Canadian I’m also interested in Progressive Waste Solutions (BIN), but I feel like the valuation is too high right now. Maybe I’ll pick some up on a pullback.
    My Road to Wealth and Freedom recently posted…The Danger of Mutual Fund FeesMy Profile

    • Hi MRtWaF,

      Glad you enjoyed the article. Well, WM has been on a pretty steep climb for quite a few years and it has been difficult to buy into it at reasonable prices. Quite frankly, I considered WM and RSG many years ago but never pulled the trigger and only learned of BIN while writing this article. It too looks interesting though much smaller than WM and RSG. Keep watching these names and maybe that pullback in BIN will be coming and you’ll be able to buy at better valuations. Thanks for stopping by and sharing your thoughts.

    • Hi Tawcan,

      Always glad to share some names that might not have otherwise made your radar. Congrats on owning a piece of WM and participating in its seemingly one directional climb over the last few years. I know that many dividend investors express interest in this space yet so few actually own a piece of any of the names mentioned, myself included. Though I have looked into WM and RSG in the past I have yet to pull the trigger on either name. Surprisingly, many of the names in the waste disposal game have secondary and tertiary businesses, namely natural gas as technology improves for the gas collection at dump sites. Natural gas sales now account for a growing portion of revenues for these companies. To think, waste disposal stocks can one day be classified as energy plays. As always, I appreciate you stopping by and commenting.

  5. Divhut,

    These stocks are definitely recession proof stocks has people will always need their garbage hauled away. Being a Canadian, I currently not invested in this sector due to as you stated above for Progressive Waste Solutions with a P/E ratio over 20 and low yield , the stock is overvalued.

    • Hi IP,

      I think most investors in this sector can appreciate the resilience of these business through good times and bad. There’s no question that these names are recession proof but are they good values. That’s pretty much one of the main concerns a potential investor should ask before buying into the space. At times, many of these names seem to be overvalued but that may just be a symptom of being such a solid and steady sector that a premium will almost always be attached to the stock price. Thank you for sharing your thoughts.

  6. DH,

    Another zinger over here for us! Saw the title and was pumped to read. What’s funny is how much my family, when we were younger, disliked WM because of their high prices – to the point where we switched to a different provider (non public) where they charged us the price of 3 months for less than 1 month that WM charged – and they allowed us to have more bins, etc.. Not sure what the “growth” potentials are like down the road, but they will be around as we all throw things away and trash continues to pile up! Interesting.

    -Lanny
    Dividend Diplomats recently posted…Dividend Diplomats February Watch ListMy Profile

    • Hi DD,

      Glad I can create some catchy titles to pique your interest in my content. Your story of high WM pricing seems to resonate with others in the WM sphere. I know from my relatives up in Washington that WM operations are not only expensive but pretty strict in terms of waste collection policies etc. While companies in the waste collection space are very stable and offer a much needed service, growth for these businesses often comes from secondary and tertiary business spawned from waste collection. Many in this sector make extra income from recycling services and resell metal and paperboard materials collected. Another growing money maker for these businesses comes from energy production as landfills output more methane (natural gas) and collection and refining processes become more cost efficient. In fact, as I commented elsewhere, waste collection companies may one day be considered energy plays as natural gas output accounts for more and more of their businesses income. As always, I appreciate your comment.

    • Hi FV,

      Glad to have introduced you to a potential new dividend name to consider for your portfolio. WCN actually has a pretty wide footprint in terms of operations across the U.S. but is definitely much smaller than the big two players WM and RSG. WCN is still a relatively new player in the waste disposal space which is probably why they still aren’t as widely recognized. I appreciate you stopping by and commenting.

    • Hi Pullingmyselfup,

      WM has really come down from the valuation stratosphere in recent times and still provides a pretty reliable dividend distribution going forward. As you mentioned in your comment, WM along with other waste disposal companies have been growing their energy income from natural gas produced at landfills. The way technology advances I don’t doubt that energy will be providing an ever increasing alternative revenue stream for these businesses. Thank you for stopping by and commenting.

  7. DivHut,

    I like the concept of investing in this industry, but the metrics for some of the bigger players were never particularly appealing to me. Couple that with broad overvaluation across the sector because, like utilities, these stocks have run up, I find them even less appealing right now. But that’s what’s great about the stock market – so many choices!

    Best regards.
    Dividend Mantra recently posted…Freedom From Gives You Freedom ToMy Profile

    • Hi DM,

      So true. We have many choices when evaluating dividend paying companies and I do agree with you that the sector does seem overvalued at present. The reality though is that this sector has been overvalued for a very long time and it seems that decent valuations are hard to come by. Sometimes you have to pay up for a quality name in a ‘must have’ sector. I do think this industry, though boring and low growth when looking at trash collection and hauling to landfills, does provide some interesting high growth opportunities in selling recyclable materials as well as energy production in the form of natural gas collection from landfills. I have commented to others that with continued improvements in natural gas collection and storage, waste disposal companies may one day be considered energy plays. As always, thanks for commenting.

  8. DivHut,

    I got in on WM a little while ago and have not been disappointed by them overall. Where I live they are everywhere, and their only competitors are local municipalities. Even then they still haul for those groups and or run landfill / recycling facilities. Hell one time, during a project at my job I had to give them money to take slightly contaminated soil (just old pesticides.). As you said above in some of your replies there is a lot of opportunity here. I fully agree, trash disposal areas are becoming more limited and companies in this field already have huge recycling processing facilities.

    Nice write up. Long WM and want to be on RSG some day…
    – Gremlin

    • Hi DG,

      Thanks for sharing your holding in WM with us. There’s no doubt that from a capital appreciation standpoint, WM has performed exceptionally well over the last several years and you are not alone in being happy owning that stock. This industry is no doubt running on diminished landfill capabilities as most communities chant the NIMBY (Not in my back yard) mantra which only makes waste disposal potentially more expensive and lucrative for the operators. I still think it will be interesting to see how the secondary and tertiary businesses of waste operators will develop over time to enhance their standard waste collection business. I always appreciate you stopping by and commenting.

  9. DH,

    A lot of low yielders in this space. I’ve been long WM for years, so my YOC is decent at this point.

    As part of my strategy with WM, I bought some shares and also sold a put option on the stock when it was trading around $37-$38 per share with a strike price of $35. It was a LEAPS and ranged about two years out (I forget the exact timelines now). I pocketed a premium of about $500 after commissions as the stock did decline to $29 or so in that period but never got exercised. I’ve had a soft spot for WM ever since that nice gain.

    With the above noted, WM has had weak but consistent dividend growth over the past few years. My only concern with the company is its debt load and I do prefer other opportunities for my current investment dollars. As such, I’ll be holding my shares but not adding to them. I love the industry, though (everybody gets rid of things on a daily basis).

    Good read,
    – Ryan from GRB
    GetRichBrothers recently posted…The PurgeMy Profile

    • Hi GRB,

      Congrats on being able to own some WM stock as well as leverage your income with a LEAP. Earning a $500 premium for selling a put is a great way to make some extra income and at the very least allows you buy stock at a price that you wouldn’t mind as well if exercised. Like you, I do like the very nature of the waste disposal business as it’s essential for every individual consumer as well as businesses and industries. True, debt load may be high and dividend growth may not be all too exciting but one thing this industry has is consistency and sometimes that’s as important when investing for the long haul. Happy you enjoyed the read and I thank you for sharing with us.

    • Hi EL,

      It may not be the most exciting sector to invest in but the waste collection business has one thing going for itself, consistency. As you noted, the areas where they operate in can all be considered strongholds ensuring future consistent and reliable business. Another aspect of this sector is the potential growth these companies have from selling recyclable materials as well natural gas production. Thank you for stopping by and commenting.

    • Hi DG,

      The waste disposal sector is probably one of the more recession proof sectors that exists as its services are required throughout every economic environment. While not the most exciting business in the world it does provide reliable cash flow which usually translates into stable dividend payments. Thanks for sharing your thoughts.

        • Hi DG,

          The waste disposal business certainly lacks ‘flash’ but is in many ways very consistent and is a service that we all depend on in some form. Looking at the collection of companies highlighted WM and RSG seem to be the more compelling buys. Happy to have brought some attention to you for a sector that you might have overlooked. Thank you for commenting.

  10. Hey DivHut!

    The Waste Disposal Business does look like the kinda business that I would be interested to investing. Ty for sharing your thoughts on these businesses, have to take closer look.

    Cheers
    ANHA recently posted…Good News!My Profile

    • Hi ANHA,

      Glad to have piqued your interest in this sector. As you can see from the comments there are a few dividend bloggers who own stocks in this space. The biggest, of course, is WM with RSG following. The waste disposal business is something we rarely think about nor makes the headlines but it is one the of more important services we all depend on. Thank you for stopping by and commenting.

    • Hi BSR,

      Like you I have never invested in the waste disposal sector but have been interested in it for a while. A solid and much needed service I could not pull the trigger on some of these names because of their valuations. Of course, I kept missing the boat as many marched higher, namely WM. Still, I think I’ll keep a couple of these names on the back burner and watch for pullbacks. Thank you for commenting.

    • Hi DD,

      You make some great points. It almost seems like WM is operating as an untouchable monopoly. Pay or else. While waste disposal is a business that is recession proof and operates as a practical syndicate it’s still a business that must adhere to business rules, namely staying profitable. Of course, that’s why many like this sector but may not always like valuations. Thanks for stopping by and commenting.

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