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1 Dividend You Don't Want to Trash

http://www.fool.com/investing/general/2012/10/31/1-dividend-you-dont-want-to-trash.aspx

Justin Loiseau
October 31, 2012

Waste Management (NYSE: WM  ) reported earnings today, and Mr. Market seems satisfied for the time being. Read below for what worked, what didn't, and where this company -- and its 4.4% -- dividend ¬†might be headed in the not-so-distant future.

Number crunching
Waste Management reported sales of $3.46 billion, down 1.7% from last year's Q3 sales of $3.52 billion.

Although sales remained steady, income got trashed. The company scrapped together $214 million, or the equivalent of $0.46 diluted earnings per share. Compared to last year's $272 million third quarter, that's a 21% drop in income. The main culprits: a $32 million restructuring/union dispute, and $39 million worth of "investing impairments."

Luckily for the company, Wall Street wasn't expecting much better. Analysts predicted $0.60 diluted EPS in pre-tax income, and Waste Management's $0.61 earnings proved to be on the money. Revenue came in shy of Wall Street's $3.5 billion, but the $40 million seems to have been forgiven, judging by the stock's 0.9% increase today.

Digging deeper
In what can best be described as an Achilles' heel moment for this company, the company revealed its strengths and weaknesses this quarter.

Waste Management makes a business out of finding value where others don't, but that value can fluctuate. "Commodity price declines in our recycling and waste-to-energy operations led to a $0.10 year-over-year EPS negative impact," said President and CEO David Steiner.

In plain English, this means that the company's foolproof plan to sell people's trash back to them as either raw material or energy didn't work out so well. Average prices dropped 40% in a year, resulting in a $0.08 diluted EPS decline.

It's not that Waste Management did anything wrong, but decreasing commodity demand, and increasingly cheap energy sources -- (did someone say natural gas?) -- have pushed Waste Management's bargain bin back into the trash.

But even if people aren't buying, Waste Management's still collecting. Luckily for this company, they're collecting more than before. Collection and disposal yields improved sequentially for the first time in six quarters, providing immediate collection revenue and potentially lucrative materials for resell down the road. Operations, excluding commodity price impact, increased $115 million, or 3.3%, over 2011's third quarter.

...and the dividend?
Let's not beat around the recycling bin. Investors in Waste Management love the company's 4.4% dividend yield, and any signs of a reduction could cause shareholders to trash this stock. Waste Management doled out $164 million in dividends last quarter, putting its current payout ratio at a reasonable 70%. Let's see how it stacks up to other waste companies:

Company

Dividend Yield

Payout Ratio

Debt-to-Equity Ratio

P/E Ratio

Waste Management

4.4%

70%

1.59

16.5

US Ecology (Nasdaq: ECOL  )

3.3%

50%

0.44

15.4

Republic Services (NYSE: RSG  )

3.3%

48%

0.93

15.5

Waste Connections (NYSE: WCN