Should You Sell This Garbage Stock?

With the S&P 500 now over 1,800, you may feel compelled to start booking some profits. While many blue-chip dividend stocks are not yet overvalued on a fundamental basis, there are a few stocks that have run up quite a bit. Depending on your time horizon and circumstances, now may be an ideal time to lock in some of those gains -- particularly for Waste Management  (NYSE: WM  ) . 

This Houston-based municipal provider of waste hauling, recycling and waste-to-energy services is, in management's own words, a free cash flow machine. A favorite among dividend growth investors, Waste Management was nonetheless having trouble maintaining its growth momentum over the last couple of years. 

But over the last couple of quarters, a number of Waste Management's cost-saving initiatives and synergies have put more fire into this company. This includes Waste Management's conversion of its entire fleet to run on liquefied natural gas. While volumes declined in this quarter, price hikes and effective cost management have boosted margins across the board. Yield, which here is defined as revenue from collection, transfer and waste to energy disposal operations, has risen to 2.3% -- three times that of the same quarter last year. 

Rich valuation
All this progress has buoyed the stock price as well. Shares have risen by more than 24.4%. Waste Management now trades at almost 21 times trailing earnings -- by no means cheap.

Looking at Waste Management's average price to earnings, or P/E, ratio over the last 15 years confirms the stock's relative priciness. In fact, Waste Management's average P/E ratio over the past 15 years is 19.1 times. This means that Waste Management is historically overvalued by 9.5%.

While this stock may not yet be grossly overvalued, those who invested for the dividend just a few years ago are now sitting on gains of around 30%. Depending on your situation, you might want to think about collecting some of that windfall now.

Waste Management has proven itself to be great operator over the last couple quarters. It has managed costs very well and has waste collection down to a science. Indeed, margins are steadily rising higher, but waste volumes are now stagnant.

In the long run, Waste Management is a synergy story. Its cash flow and dividends should reaccelerate beyond the meager growth of last year, but it probably won't be anything like the double-digit growth of years past. 

Republic Services (NYSE: RSG  ) , Waste Management's biggest competitor, trades at a more reasonable 18 times trailing earnings, much closer to its average P/E ratio. Analysts also expect to see at least modest growth from Republic. Republic may be a somewhat better value here, but it also has a slightly lower return on assets than Waste Management, as well as slightly lower margins over the last few years. 

Bottom line
Regardless of where Republic stands, in my opinion Waste Management is moderately overvalued, and no longer the high-growth story it was years ago. If you were in the stock primarily for dividends, but are now sitting on outsized capital gains, you might want to think about whether Waste Management still merits a place in your portfolio. 


Read/Post Comments (3) | Recommend This Article (6)

Comments from our Foolish Readers

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  • Report this Comment On January 10, 2014, at 5:23 PM, willy325 wrote:

    Being overvalued one month or one year could be undervalued a year later. I have held WM for well over a decade and reinvested the dividends. This company will have it's ups and downs but with dividends compounding you will always make money.

    All one needs to do is look at the chart from 2000 on. The price goes from about 12 dollars a share to 43 bucks. With dividends reinvested you are making great money. Buy and hold good companies until the story changes. You cannot time the market and you can grow wealthy by sitting tight and worry free.

    Be an investor. Trading is for gamblers.

  • Report this Comment On January 10, 2014, at 6:51 PM, storm11 wrote:

    The ultimate DRIP stock. The continued growth of our Amazon et al driven online purchase and delivery economy will drive Waste Management's business model for a long long time!

  • Report this Comment On January 22, 2014, at 4:07 PM, jambo297 wrote:

    I sold about 25% of my position in WM to take some profit and bought an initial position in Republic (RSG) for the reasons stated in this article.

    In my area (Large Metro) WM & RSG are in a price war. This is reported 39% of their market. But in small / midsize markets (35%) they say RSG is the clear leader. RSG is buying new vehicles. 50% are n. gas fueled (goal is 20% of fleet are to be natural gas) and are doing other productivity improvements.

    Watch the price of diesel to get an idea where their costs will go in 2014. I like garbage companies 'cause the garbage comes every day.

    Joe

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9/30/2014 4:03 PM
RSG $39.02 Up +0.22 +0.57%
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Waste Management CAPS Rating: *****

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