Waste Management (WM -0.52%) is known for being a stable stalwart, allowing the company to see steady returns despite the tumultuous economic climate. Shares of the company are down only 3% year to date, which is better performance than even the Dow Jones Industrial Average -- an index known for being less volatile than other major indices.
Waste Management often gets written off as a boring company, but some investors may be overlooking a few facts showing that Waste Management might not be as "boring" a stock as many may think. While Waste Management's business isn't building the latest innovative technology, its strength in the space and its shareholder-friendly actions are rather exciting. Additionally, there might be more expansion in store for the industry, which Waste Management looks poised to capitalize on as the leader. Here's why you might want to look harder at this safe stock.
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1. Waste Management has the (pricing) power!
This company could be considered a business with underestimated pricing power -- the ability to raise prices consistently without seeing customers leave. Waste Management steadily raised its core price, which consists of fees, surcharges, and additional price increases for customers, from roughly 3.5% in 2015 to 4% in 2019. The company's core price dipped in 2020 but came back even stronger in 2021 and 2022. Waste Management's core price in the second quarter of 2022 was 7.5% -- a record for the company.
How does Waste Management have such robust pricing power? First, garbage pickup and disposal is a need-to-have service for businesses and consumers in any economic condition. With Waste Management as the top dog with almost 25% market share, it would be hard to change to a different provider, so many customers instead stay with Waste Management.
The second reason lies in the cost for customers compared to other expenses. As COO John Morris explained in the Q2 conference call, Waste Management's fees represent a minuscule amount of a company's overall cost structure. Waste Management's fees are typically just 0.5% of the company's total spending. Therefore, customers are either willing to accept these small price hikes or barely notice them at all.
This helps the company boost prices without seeing significant churn. While management hasn't explicitly said it, given the sticky prices, there's reason to believe that the company could continue steadily increasing its core price, resulting in higher profitability, over the long term.
2. Dividends are likely going to shoot higher
Another reason to be optimistic about Waste Management for the long haul is its expected dividend appreciation. The company has increased its dividend for 19 straight years, putting it well on its way to becoming a Dividend Aristocrat (a company that has increased its dividend for at least 25 consecutive years).
Another thing to note is the company's relatively low payout ratio. Waste Management only used roughly 38% of its net income to pay its dividend in 2021, which is a very healthy figure. As the company finds fewer ways to spend its net income, it could deliver a larger dividend. In short, there are reasons to believe that the company's payout to shareholders will steadily improve over the long haul.
3. There's more growth than one might assume
While it might not be like the tech market, the waste management space could rise faster than you might have thought. According to Markets and Markets, the total waste management industry should grow at a compound annual rate above 5% from 2021 to 2026 to $543 billion. Considering Waste Management is the top dog yet has only generated $19 billion in trailing-12-month revenue, the company looks poised to benefit from this expansion.
Why is Waste Management positioned the best? The company's competitive advantage comes not only from its domination but also from the industry's high barriers to entry. For example, landfill construction can cost up to $800,000 per acre, and Waste Management had 260 active landfills as of July 2022. Therefore, for other rivals to obtain the same amount of capital as Waste Management (especially smaller competitors), it would require ample time and money.
With dividends rising, a larger-than-expected opportunity, and durable pricing power that will likely continue to bolster the company's bottom line, Waste Management has the potential to post lucrative returns over the long term. That sounds like enough reason to get excited about this "boring" stock. If you don't already own shares of Waste Management, you might want to put it on your watch list.
