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3 Strengths of Waste Management, Inc.

By John Bromels – Updated Nov 17, 2016 at 7:04AM

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Most people don't like to think about where their trash goes. But savvy investors will want to consider this major garbage hauler.

All-star investor Peter Lynch said he liked companies that did something boring, and it was even better if what they did was a little bit disgusting. "Something that makes people shrug, retch, or turn away in disgust is ideal." 

And that's the perfect description of Waste Management (WM 2.86%). Even its name is a little bit disgusting, albeit descriptive.

For investors, the company is anything but gross. It's had a solid 2016 (although I probably shouldn't use the word "solid" in conjunction with "waste"), handily beating the S&P 500 and edging out major competitor Republic Services (RSG 1.05%):

WM Chart

WM data by YCharts

So, besides the smell, here are three things that are strong about Waste Management.

Trash is a pretty revolting business. But it's paid off for Waste Management investors. Image source: Getty Images.

Strong performance

Waste Management has been good to its shareholders over the past decade. Its stock has steadily risen, and its dividend compares favorably with Republic Services'. The top chart compares price, and the bottom compares dividend yield for the two companies:

<WM Chart

WM data by YCharts

For a major industrial company, Waste Management is relatively young. The company was founded in 1971 and incorporated in 1987, and after a major 1998 merger it became the largest landfill operator in North America. The company also handles waste collection and transfer, generates energy from the gas its landfills produce, and recycles various materials, such as paper, glass, and metal.

While past performance is not necessarily related to future growth, Waste Management's strong history of creating shareholder value should give investors confidence in the company.

Diversity... of a sort

No, Waste Management isn't what you would call a "diversified" company that you will find in other companies within the industrial sector. But even in its narrow field, the company has managed to inject some diversity into its operations.

For one thing, the company is involved in many different aspects of the waste-management industry. While its largest division by far is collection of trash and recyclables, which provides 55% of the company's revenues, Waste Management also derives portions of its revenue from its landfills (19%), its transfer stations (9%), and recycling (7.6%). Another 9.5% of the company's revenue comes from a very diverse group of smaller endeavors, including account management services, special disposal of residue from coal ash and oil and gas exploration, and producing landfill gas as a renewable energy resource.

Even within the company's largest division -- collection -- it has a diverse client pool. No single customer accounts for more than 1% of the company's revenues. And collection revenue is split pretty evenly among commercial (39.5%), residential (29.6%), and industrial (26.7%) clients. The remaining 4.2% comes from "other" collection clients.

So for a company that operates in a single business line -- trash -- Waste Management is surprisingly diversified within that business line.

No end in sight

A friend once told me about her grandparents' prowess in choosing careers. One, she said, was a baker and the other an undertaker, "because everybody's gotta eat and everybody's gonna die."

Well, like food and death (and taxes), trash is also universal. While you might hear from time to time about some rugged individual who claims to create no trash, just about everybody on the planet does. And that's good for Waste Management, because while a consumer might put off buying the newest iPhone, or a business might delay the purchase of major equipment, nobody can go for very long without taking out the trash. This ensures a steady stream of business for garbage haulers like Waste Management.  

Most of Waste Management's clients are commercial or industrial customers that typically sign a three-year agreement with the company. Residential clients are usually municipal governments that sign a three-to-six year contract with the company to haul away all trash (and sometimes recyclables) in a given area. These multi-year contracts give Waste Management some stability from year to year. Customer churn is low, at only 9.1% in the second quarter of 2016.

Investor takeaway

Despite its status as a slow-growing company in a boring, slightly disgusting industry, Waste Management has been a good stock to own over the past 10 years. More than that, it has been a stable stock in terms of share appreciation, dividend payout, and EPS, particularly compared with a volatile stock like Darling Ingredients:

WM Normalized Diluted EPS (TTM) Chart

WM Normalized Diluted EPS (TTM) data by YCharts

Investors looking for some stability in their portfolio should definitely consider Waste Management as a ballast to other, more volatile stocks.

John Bromels owns shares of Waste Management. The Motley Fool owns shares of General Electric and Waste Management. The Motley Fool recommends Republic Services. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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