After Waste Management (WM -0.52%) reported its third-quarter results, its leadership team shared some important information with investors during the subsequent conference call. Here are the key takeaways for long-term shareholders.
1. Pricing power remains strong
We continue to focus on disciplined pricing, as demonstrated by core price continuing to exceed our full-year target. In the third quarter, our collection and disposal core price was 4.7%, and our yield was 2%. Our strong pricing led to income from operations growing 8.3% and income from operations margin improving 60 basis points. -- CEO James Fish
Waste Management's irreplaceable landfills, transfer stations, and recycling centers combine to form a wide economic moat that insulates its business from the competition. In turn, the trash titan is able to consistently raise its fees. Together with its cost-control initiatives, these price increases are fueling margin expansion and earnings growth.
2. Hurricanes boost demand
In Texas, for example, in Houston, specifically, a lot of that hurricane debris has gone to these temporary holding areas. And I assume that the reason for that was to get it off of people's yards as quickly as they could. So a lot of the debris has not yet made its way to landfills. And so we think there's some real opportunity. The collection side of the business is really handled, for the most part, by FEMA, and so we don't see a whole lot on the collection side. Where we ultimately see benefit from natural disasters is in the landfills, and then once reconstruction begins, we see it in our roll-off line of business. -- Fish
The devastation wrought by hurricanes like Harvey and Irma increased the need for landfill services. Image source: Getty Images.
While many businesses such as restaurants and retailers often see their operations damaged by the hurricanes and their aftermath, Waste Management tends to experience an uptick in demand for its services. More trash is deposited at its landfills during the cleanup process, as well as from the subsequent heightened construction activity as communities work to rebuild. In this way, Waste Management can serve as a defensive stock that could provide investors' portfolios an element of protection from the potential negative consequences of climate change.
3. More gas = more profits
[W]e're seeing a very nice payback for a CNG [compressed natural gas] truck versus the diesel truck in terms of not only the cost of fuel, but also maintenance cost. -- Fish
Advances in hydraulic fracturing and horizontal drilling methods have led to a boom in U.S. natural gas production. This, in turn, has ushered in a period of low natural gas prices. Waste Management has wisely taken advantage of this situation by converting a steadily increasing portion of its truck fleet from traditional diesel engines to cleaner-burning -- and more cost-efficient -- CNG-powered vehicles. This is helping to lower costs and, by extension, increase profits.
4. Cash generation is at record levels
Just as we have seen all year, the strength of our operating results continues to drive significant growth in our cash flow from operations and free cash flow. In fact, in the third quarter of 2017, we achieved the highest cash provided by operating activities that we have ever seen, at $856 million. This compares to $758 million in the third quarter of 2016, and that's an increase of $98 million or almost 13%. -- CFO Devina Rankin
Waste Management is finding new ways to generate more cash flow from each dollar of sales; its third-quarter operating cash flow as a percentage of revenue was 23% -- a 160-basis-point improvement from the third quarter of 2016. Management expects operating cash flow to remain at this new rate of 22% to 23% of revenue, up from about 20% in prior years.
5. And management is committed to passing on this cash to shareholders
In the third quarter, we entered into an agreement to repurchase $500 million of our outstanding stock over the remainder of the year. We also paid $185 million in dividends. ... Through the first nine months of the year, we have returned over $1.3 billion to our shareholders. -- Rankin
Waste Management's dividend policy includes a long-term target payout ratio of about 50%. Management is confident that the company can consistently produce at least $1.6 billion in annual free cash flow, so it could pay out as much as $800 million in dividends every year. That would represent a 2.3% yield at Waste Management's current market cap of $35.5 billion, making the trash titan a solid option for income-focused investors to consider.
