Dividend stocks outperform non-dividend-paying stocks over the long run. It happens in good markets and bad, and the benefit of dividends can be quite striking -- dividend payments have made up about 40% of the market's average annual return from 1936 to the present day.
But few of us can invest in every single dividend-paying stock on the market, and even if we could, we're likely to find better gains by being selective. Today, two waste management companies will square off in a head-to-head battle to determine which offers a better dividend for your portfolio.
Tale of the tape
Established in 1971, Waste Management, (WM 0.22%), formerly known as USA Waste Services, is one of the world's largest integrated environmental services providers, serving customers in the United States, Canada, and Puerto Rico. Headquartered in Houston, the company serves more than 27 million customers through a robust network of 367 collection operations, 355 transfer stations, 273 active landfill disposal sites, as well as 16 waste-to-energy plants, 104 recycling plants and 111 beneficial-use landfill gas projects. Waste-collection services account for more than half of Waste Management's revenue, and the company plans to manage more than 20 million tons of waste every year by 2020 while also investing in more sustainable processes, such as converting organic waste into high-end compost for local growers.
Founded in 1853, Veolia Environnement SA (ADR) (VEOEY 0.46%) is the world's largest environmental-management services company. Veolia provides water supply and management services as well as waste management, waste-to-energy processes, and transportation services in 48 countries. Headquartered in Paris, France, Veolia has more than 220,000 employees who help provide approximately 100 million people with safe drinking water and 71 million people with sanitation solutions, while also managing 60 million metric tons of waste every year. The company also provides energy to more than 120,000 facilities for industrial, municipal, and individual clients, while Veolia Transdev operates bus, light-rail, and rail transportation systems in more than 30 countries.
|
Statistic |
Waste Management |
Veolia |
|---|---|---|
|
Market cap |
$18.9 billion |
$10.6 billion |
|
P/E ratio |
196.1 |
92.6 |
|
Trailing-12-month profit margin |
0.7% |
0.8% |
|
TTM free cash flow margin* |
8.5% |
8.3% |
|
Five-year total return |
96.9% |
9.2% |
Source: Morningstar and YCharts.
* Free cash flow margin is free cash flow divided by revenue for the trailing 12 months.
Round 1: Endurance (dividend-paying streak)
According to Dividata, Waste Management began making annual shareholder distributions in 1998, before switching to quarterly dividend payments in 2004. By contrast, Veolia has paid uninterrupted dividends for 13 years in a row since its ADR shares first began trading in the United States in 2001. Waste Management wins this round, but not by much.
Winner: Waste Management, 1-0.
Round 2: Stability (dividend-raising streak)
Waste Management has increased shareholder distributions at least once each year since 2004, which works out to a 10-year dividend-raising streak. On the other hand, Veolia was forced to make substantial reductions in its payouts since the global financial crisis of 2008, and its last payment in May of 2013 was actually lower than the one made in 2012. Veolia's lack of any sort of streak gives Waste Management an easy win here.
Winner: Waste Management, 2-0.
Round 3: Power (dividend yield)
Some dividends are enticing, but others are merely tokens that barely affect an investor's decision. Have our two companies sustained strong yields over time? Let's take a look:
WM Dividend Yield (TTM) data by YCharts.
Winner: Veolia, 1-2.
Round 4: Strength (recent dividend growth)
A stock's yield can stay high without much effort if its share price doesn't budge, so let's take a look at the growth in payouts over the past five years.
WM Dividend data by YCharts.
Winner: Waste Management, 3-1.
Round 5: Flexibility (free cash flow payout ratio)
A company that pays out too much of its free cash flow in dividends could be at risk of a cutback, particularly if business weakens. We want to see sustainable payouts, so lower is better:
WM Cash Dividend Payout Ratio (TTM) data by YCharts.
Veolia's free cash flow payout ratio doesn't show up on YCharts, but Morningstar's data gives us a clearer picture: The company has not sustained positive free cash flow for some time, which means that any payout will necessarily produce a negative ratio, throwing this one to Waste Management as well.
Winner: Waste Management, 4-1.
Bonus round: opportunities and threats
Waste Management may have won the best-of-five on the basis of its history, but investors should never base their decisions on past performance alone. Tomorrow might bring a far different business environment, so it's important to also examine each company's potential, whether it happens to be nearly boundless or constrained too tightly for growth.
Waste Management opportunities
- Waste Management will cut fuel and maintenance costs with a natural gas-powered truck fleet.
- Waste Management is streamlining businesses to become an "environmental solutions" provider.
- Waste Management's waste-to-energy projects produce about as much power as every solar energy installation in the U.S. combined.
Veolia opportunities
- The Water Resources Group forecasts fresh water demand exceeding supply by 40% by 2030.
- Drinking water is a $400 billion-plus business each year, and Veolia already has a big chunk of it.
Waste Management threats
- Weaker commodity prices are weighing down Waste Management's recycling margins.
- Waste Management offered underwhelming full-year earnings guidance for 2014.
Veolia threats
- Veolia continues to recover from overexpansion problems, but its major divisions still struggle to produce any growth.
One dividend to rule them all
In this writer's humble opinion, it seems that Waste Management has a better shot at long-term outperformance, thanks to its dominant position in North American waste management markets. The company's aggressive expense reductions, coupled with more waste-to-energy projects, could be a double whammy of long-term savings for the company. While Veolia seems well-positioned to thrive in a world of scarcer fresh water, it (and Waste Management) continues to struggle with higher costs and lower waste volumes. You might disagree, and if so, you're encouraged to share your viewpoint in the comments below. No dividend is completely perfect, but some are bound to produce better results than others. Keep your eyes open -- you never know where you might find the next great dividend stock!
