WM (WM -0.52%), formerly known as Waste Management, is one of the few industrial stocks that is outperforming the Nasdaq Composite, S&P 500, and Dow Jones Industrial Average so far in 2022. In fact, share prices of WM are down just 7% from their all-time highs, while the Nasdaq is in a deep bear market and the S&P 500 is just a few percentage points away from a bear market.
Here's why WM is a safe dividend stock worth considering now.
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A balanced business
WM is the largest integrated waste collection, transportation, and storage/disposal company in North America. Demand for its services is far less correlated to the economic cycle than most industrial companies. For that reason, WM's results don't boom and bust to the tune of the broader economy.
Granted, a large chunk of WM's business is tied to commercial and industrial customers, not just residential. So if those customers have fewer waste needs because they are producing or selling less stuff, then WM could suffer. However, the company does have annuity-like contracts that insulate it from risks like this.
Stress tested
2020 provides an excellent stress test that shows how resilient WM's results were during a year when so many industrial companies had their worst performance in a decade or more.
WM Revenue (Annual) data by YCharts
In 2020, WM's revenue declined by less than 2% year over year; net income fell by just 10%; and free cash flow (FCF) fell by only 14%. Then in 2021, WM booked all-time high revenue and FCF and close to all-time-high net income. Put another way, WM put up excellent results during a year when industrial and commercial businesses ground to a halt -- a sign of its recession resilience.
Dividend Aristocrat by 2028
WM's FCF has soared in recent years as WM improves its operations organically and through investments like its 2020 acquisition of Advanced Disposal, which expanded its reach across the U.S.
FCF can be used to pay dividends, reinvest in the business, repurchase stock, or pay down debt. WM's record-high FCF supports the company's ability to continue to raise its dividend. In fact, WM has raised its dividend every year for 19 consecutive years, putting it on track to become a Dividend Aristocrat -- an S&P 500 component that pays and increases its dividend for 25 straight years -- by 2028.
WM's dividend is fully supported using FCF, not debt, which leaves the company extra room to repurchase shares.
WM Free Cash Flow (Annual) data by YCharts
WM's share buybacks and total dividends paid have risen in lockstep with its FCF, which means that WM shareholders directly benefit from its higher FCF generation.
The future looks bright (and smells terrible)
As for the long term, WM is investing heavily in lowering its carbon footprint, mainly through recycling and renewable natural gas (RNG). RNG, also known as biogas, involves capturing methane from a landfill, a dairy farm, etc., and then processing it so it can be used as pipeline-quality natural gas. Given that the methane would have otherwise been emitted into the atmosphere, the process is considered renewable.
In late April, WM announced a plan to invest $825 million into expanding RNG infrastructure, both in terms of using RNG as a fuel source and by building out its network of RNG production plants. WM can reduce its transportation emissions by running trucks on RNG that is condensed into what's called compressed natural gas (CNG). CNG already has lower emissions than diesel or gasoline. Sourcing the CNG from landfill gas further drives down emissions. WM can also sell excess RNG produced from its landfills to other end users, or potentially even transport it via pipeline to a liquefied natural gas (LNG) export terminal to be cooled and condensed into LNG and shipped to buyers overseas. Simply put, WM has unlocked a whole new revenue stream through RNG, while simultaneously bringing it closer to reaching its long-term environmental, social, and governance (ESG) goals.
A source of stability during an uncertain time
WM is unlikely to produce outsized market returns when times are good. But when inflation is high, interest rates are rising, and a recession could be looming on the horizon, WM is the kind of company you'll want in your corner. Investors should be aware that WM is not a cheap stock by any means, with a price-to-FCF and price-to-earnings ratio that are both well above their 5-year median levels. Therefore, WM is an investment that makes the most sense for risk-averse investors seeking passive income, who don't mind paying a premium price for a quality company.
