This Safety Stock Already Defeated a Huge Stress Test

What is one constant around us that is always needed, even during the pandemic? Trash removal. In this video clip from "The Rank" on Motley Fool Live, recorded on March 7, Fool.com contributors Tyler Crowe and Jason Hall discuss the business stability of Waste Management (WM 0.50%), the largest waste disposal company in the U.S., and its attractiveness to investors.

Tyler Crowe: They take out your trash. [laughs] That's it. They are the largest waste service disposal company in America after I think buying No. 3 a few years ago, Waste Connections (WCN -0.36%) [acquisition was actually of Advanced Disposal].

The business model sounds as simple as it is. The majority of their revenue comes from collections, either from individual residences or municipal contracts. Pretty steady thing. We all generate trash, we all have to pay our tipping fees. If there is anything that makes it somewhat I guess you could say less safe, I would say, one of the things that it's going to wax and wane a little bit with economic productivity or GDP because a lot of waste is generated in construction and industrial industries. So if you start to see a little decline there, sometimes the waste can go down.

But if you want to talk about safety of the business, we just basically put it through one of the best stress tests that we could possibly have in terms of the pandemic, with construction shutting down, industrial production shutting down, and sure revenue went down, earnings went down a little bit, but it wasn't like catastrophic in any way. Dividends were the same. They still were able to buy back stock in the last couple of years. So it's not like it was a financial disaster for them.

But here's the thing that I want to make the case because I was the only one that ranked this No. 1, you guys had Berkshire as No. 1. Even though there is a slight economic bellwether to Waste Management with like I said, construction, industrial waste, waxing and waning a little bit, and the recycling business can go with commodity prices, there are a lot more cyclical and economically sensitive or businesses that are a little bit more sensitive to economic cycles in the Berkshire (BRK.A -0.12%) (BRK.B -0.06%) portfolio than Waste Management itself.

Jason Hall: 100% right.

Crowe: So that would be my argument that in terms of the risks and reward, you can't get much more stable than Waste Management itself. There could be the argument that maybe management runs into the ground, but I don't know. It's one of those businesses I feel like if my dog was the CEO, they'd still make pretty good money.

Hall: It's the Peter Lynch quote on companies that some idiot could run because eventually, some idiot will run it, I think.

Crowe: Exactly.

Hall: Tyler, I have just a question, too, about something that I haven't looked honestly, it's been a year since I looked at the annual report, really dug in. But I know one of their durable competitive advantages over the years is owning the landfills because it's put them in a position where even if they don't have the contracts for some of the areas around, if somebody takes that contract away, they still get to take some of the money from the provider because they own the landfill.

Crowe: There are a few economic moats as sturdy as a landfill because the permitting process, the development, the construction, there's a lot of construction and inspection that goes into a landfill that we probably don't think about, the amount of waterproof barrier, shields that you have to put into, the amount of methane collection facilities, wastewater collection facilities that are built into all of these things. The simple fact that if you are able to get one in a region, you have a de facto geographic monopoly.

Hall: For decades and decades and decades.

Crowe: For decades and decades. Just to give a small example, a small town up where I live or I grew up is the town of Bethlehem, New Hampshire, it's right next door. They had a landfill owned by Casella (CWST -0.59%). Casella is a smaller waste management company, but they're big enough, they're publicly traded, and they have spent 20 years trying to either expand operations at the current landfill they have or try to get one in the new area. A lot of NIMBY, not in my backyard aspect. The woods of New Hampshire is sacred kind of thing, but it's small.

Hall: Nobody wants a landfill a mile away.

Crowe: Exactly. It's an anecdotal evidence that tends to be wider spread of the fact that if you can get a landfill built, it's going to generate cash for you. Another anecdotal story that I really love about Waste Management specifically, it actually goes back to when I was in college. I was doing civil engineering, and this was before, Jason probably knows about Waste Management, a lot of their fleet runs on natural gas trucks because they actually create methane at a landfill and they're like, "Hey, let's just put it in our trucks."

But 20 years ago when I was in college, they hadn't come up with the truck fleet yet, but the local Waste Management landfill and the university signed a deal where the landfill would pipe all of their excess methane gas to the cogen plant at the university and that became our entire power-generating source and heat because we were a steam heat, boilers, and everything like that. I think the entire project to convert the entire cogen facility over to methane, it paid back in two-and-a-half years.

Jason Hall: It's incredible.

Tyler Crowe: Waste Management took one of their most expensive costs, which was managing.

Jason Hall: Turned it to a revenue stream.

Tyler Crowe: It turned it into a revenue source, and they've been doing that for years for things like, like I said, natural gas fleets running on the methane they create in their own landfills.