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