The stock market has been a wild place as of late. From short squeezes to renewed interest in bitcoin, there can be a lot to take in. Most investors are better off ignoring these distractions and sticking to investing basics. As Warren Buffett once said, "Risk comes from not knowing what you're doing."
One easy way to gain conviction is by investing in companies you can understand. This philosophy has special importance for retirees looking to generate income from stable and reliable dividend stocks. Waste Management (WM -0.83%) may not be the most glamorous company. But its business model is easy to understand and has recession resilience. Here's why Waste Management is a retiree's dream stock.
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An easy-to-understand business
At its core, Waste Management benefits from one of the most reliable long-term trends around -- consumerism. Consumerism fueled by a growing population and a growing economy equals more trash. And an environmentally conscious population means more recycling.
If you're familiar with Waste Management, it's probably because the company collects your trash and recycling. But revenue from its residential collection comprised just 18% of total revenue for the nine months ended Sep. 30, 2020. The company's collection business also consists of industrial and commercial segments whose customer bases are sprinkled throughout a variety of different industries across the public and private sector. This gives Waste Management a diverse revenue mix. But collection is just part of Waste Management's integrated value chain.
Transfer, landfill, and recycling all involve managing and sorting waste based on its most efficient use. Waste Management operates the largest landfill network in the U.S. and Canada. Here's a breakdown of the company's revenue by segment for the nine months ended Sep. 30, 2020.
Results for the nine months ended Sep. 30, 2020. Data source: Waste Management.
Consistent performance
Waste Management's diverse revenue mix proved resilient in 2020, so much so that the company updated its guidance and now expects full-year revenue to decline 3.25% to 3.75%. Spending cuts have helped Waste Management sustain high free cash flow (FCF). In fact, the company reported its highest FCF in history in the fourth quarter of 2019 and its second highest in the third quarter of 2020. For the year, the company now expects to earn $2 billion in FCF while returning around $920 million to shareholders in the form of dividends. The consistency is uncanny, as Waste Management also earned $2.08 billion in FCF in 2018 and $2.11 billion in 2019. However, 2018 results included around $200 million in asset sales, whereas Waste Management will pay around $100 million in transaction and advisory costs related to its Advanced Disposal acquisition.
WM Free Cash Flow data by YCharts
A Dividend Aristocrat in the making
The company's revenue rebound and strong FCF generation have convinced management to increase the annual dividend by 5.5% to $2.30 per share in 2021 and repurchase up to $1.35 billion in stock. That's a significant indicator of confidence for investors, considering that Waste Management had suspended its share buyback program during the pandemic. In hindsight, this was probably a good decision because it alleviated pressure and helped the company focus on streamlining its business, the benefits of which are expected to last for years to come.
At its current pace, Waste Management is on its way toward becoming a Dividend Aristocrat. Dividend Aristocrats are members of the S&P 500 that have increased their annual payout for at least 25 consecutive years. Waste Management has increased its dividend payment for 18 consecutive years thanks to its consistent FCF generation.
WM Total Return Level data by YCharts
Passing the test
2020 tested the resilience of Waste Management's business model. Expecting a mere 3.5% decline in revenue and comparable FCF to 2019, the company should pass with flying colors. Waste Management's consistent FCF generation directly benefits investors in the form of dividends. Likely to return to growth in 2021, Waste Management is one of the best industrial stocks for retirees to buy right now.
