After bottoming on March 23, the S&P 500 went on a seemingly unstoppable run, rising over 60% in less than six months before hitting a new all-time high on Sept. 2. Since then, things have looked a little shakier, with the index falling around 9% from that high.
There are many reasons why the market has sold off -- fears regarding a prolonged slowdown in the economy, an uptick in COVID-19 cases, higher than expected unemployment numbers, and most importantly, the simple idea that equity valuations got ahead of themselves.
Stock market corrections can be good for long-term investors who are net buyers of stocks, and therefore can embrace short-term sales instead of shying away from them. Picking up shares in stable companies that pay dividends can be a great way to round out your portfolio and collect some extra income on the side. Here are three reasons I think Waste Management (WM 0.27%) fits this mold, and why I ultimately decided to buy the stock.
1. Industry-leading position in a growing industry
Waste Management is the undisputed leader in the U.S. waste industry. Its $300 million discount on acquiring Advanced Disposal Services (ADSW), the fourth-largest waste company in the U.S., looks to be a great way to solidify this position.
Waste Management benefits from an incredibly strong tailwind -- a rising population, which means more trash and recycling. Unlike smaller companies, counties, or cities, Waste Management's scale and scope allow it to cover the entire integrated value chain of collection, transportation, and disposal -- unlocking efficiencies that allow it to run its business in an environmentally conscious way. The company has found ways to make its operations safer and cleaner by reducing on-road fleet emissions and managing the impact of landfills on the communities it serves. Given the rise of ESG investing, and the hazardous conditions and safety concerns inherent in the waste management industry, the company looks well-positioned to be able to grow its business in lockstep with the demands and preferences of the present and future economy.
2. Resilient and consistent performance
There are many reasons to believe that Waste Management stock will thrive during a recession. For starters, the company has consistently performed well in challenging markets, generally outperforming the S&P 500 and the industrial sector as a whole during years when the market produced a total return of less than 5%. Investors looking for buys in today's uncertain market can take solace in the fact that Waste Management produced positive total returns in 2000, 2001, 2008, and 2018, all of which were negative if not brutal years for the broader stock market.
Although the company will suffer during a slowing economy, the downside risk is limited due to a baseline demand for its services. It's worth noting that the company's business has slowed, but it expects total revenue to finish the year down just 4% to 5% compared to 2019. It also expects its operating EBITDA margin to be around the same as last year. The company attributes this minimal decline to its diversified customer base over a broad swath of industries, some of which are only slightly affected by the pandemic. So far this year, revenue is down less than 5% compared to the first half of 2019.
Thanks to a diversified customer base, none of Waste Management's segments were down more than 8%, and no one segment made up more than 23% of revenue. The company has once again proved that its business is capable of succeeding even in a challenging business climate.
3. A stable and growing dividend
Aside from its industry-leading position, recession resilience, and diversified sources of revenue, Waste Management pays a growing dividend. The company raised its 2020 quarterly dividend by more than 6% compared to 2019. Since 2004, its dividend has increased nearly three-fold, and has grown at an average compound annual growth rate of around 6% over the past five years. Waste Management yields 2% at the time of this writing.
A company you can count on
Waste Management's industry-leading position, growing business, strong performance during downturns, market outperformance, and growing dividend offer more than enough reasons to pick up a few shares.
Investors who are fearful of a stock market crash or are simply looking for a safe and reliable company to round out their portfolio should look no further than Waste Management.