Businesses that provide essential services tend to perform steadily through the different phases of the business cycle. Thus, they can be fertile ground from which investors can cultivate a portfolio of dependable stocks that can be counted on in all manner of market conditions.
In this regard, few services are as essential as waste collection. Modern society simply couldn't function without it. And within this vital industry, one company reigns supreme. Read on to learn more about it.
Our trash is this waste collector's treasure. Image source: Waste Management.
Fittingly, a company named Waste Management (WM 0.60%) is the leading provider of waste collection and recycling solutions in North America, serving more than 21 million customers in the U.S. and Canada. It owns the largest network of recycling facilities, transfer stations, and landfills in the industry. This creates a wide competitive moat around Waste Management's business, as the onerous regulatory approval process for new waste facilities and the "not-in-my-backyard" attitude among many homeowners make it nearly impossible for competitors to replicate its collection of valuable assets.
With its revenue sources and cash flows well defended, Waste Management is able to return capital to its shareholders via stock buybacks and a steadily rising dividend -- both of which help to drive its share price higher over time.
Unless people stop producing garbage, Waste Management's 2.2% dividend yield should remain well secured. And with the company still paying out less than 60% of its earnings, its 14-year streak of annual dividend increases is also likely to continue unabated for the foreseeable future.
Yet the company isn't just resting on its laurels. Rather, it's constantly on the hunt for value-creating acquisitions, as explained by CEO James Fish during Waste Management's first-quarter earnings call:
So when we think about M&A [mergers and acquisitions], we're certainly interested in core acquisitions. And to your question, we would define core as being, of course, core solid waste, industrial, hazardous, potentially energy services, even recycling. All of those, we throw in that core bucket. So anything that would be a good strategic fit for us within those core buckets at a fair price, we would consider, and we continue to look for those.
Waste Management's growth-through-acquisition strategy has been of great benefit to shareholders. Due in part to the regulatory hurdles and homeowner objections to building new waste-processing facilities, the company instead focuses more on acquiring smaller businesses to expand its operations. In this way, it's able to further consolidate the waste-collection industry and widen its competitive moat.
Moreover, Waste Management's business is likely to receive a near-term boost from the massive clean-up operation to be conducted following the recent mega-storms that have devastated large portions of the southern U.S. An enormous amount of debris will need to be cleared away as part of this likely multiyear rebuilding effort, and Waste Management should play an important role in this regard.
All told, with its nearly unassailable competitive position, strong cash-generation abilities, and value-creating capital return program, Waste Management is the type of stalwart business that investors can count on not only in 2017, but also for many years to come. Shares can currently be had for about 22 times forward earnings, compared to roughly 19 for the S&P 500. That's a fair price to pay for a business with such strong competitive advantages, and investors who buy today are likely to be well rewarded in the years -- and perhaps even decades -- ahead.
