Since the turn of the century, Waste Management (WM -1.22%) has been a standout investment -- rising 600%, or nearly double the Dow Jones Industrial Average's 310% total return. Of course, we can't merely point to the past and say, "Therefore, Waste Management is a buy going forward."
But we can discuss why the company's immense cash generation ability leaves it positioned to be a winning investment over the next two decades. Generating $4.4 billion in cash from operations over the past year alone, the company has excess cash flows to fund new growth initiatives -- further entrenching its leadership position in the waste and recycling industry.
Here's what makes the company an excellent bet to continue beating the Dow Jones over the long haul.
Waste Management: Top of the (trash) heap
Commanding a 24% market share of North America's waste and recycling industry, Waste Management is as large as its next two most significant competitors combined. Home to North America's largest landfill network, with 254 active landfills, the company also has over 15,000 collection routes and 96 recycling facilities.
As powerful as this massive network of collection routes, transfer facilities, and recycling centers is, Waste Management's ability to monetize a by-product of its core collections business also gives it a considerable advantage over its peers. Here's how Waste Management does it.
Gradually filling its landfills with waste over time, the company collects landfill gases created as a by-product of the decomposing waste. These gases are then processed at Waste Management's facilities and turned into renewable natural gases (RNG). From here, the company can use the RNG to fuel its fleet of compressed natural gas-powered collection vehicles -- thus creating a cycle of efficiency.
Thanks to this in-house RNG production, Waste Management now fuels 74% of its fleet with its own RNG -- with excess left over to sell on the open market abroad or to other industrial companies. Naturally, being able to monetize the by-product of its core business is a massive advantage, so the company is spending heavily to build out its capabilities in this department.
Planning to spend $1.2 billion through 2026 on new RNG facilities, Waste Management aims to generate an additional $450 million in free cash flow (FCF) annually once its capital expenditures (capex) start paying off. While taking a bite out of the company's current FCF figures, these investments could pay huge dividends further down the road as Waste Management diversifies its operations.
WM Cash from Operations (TTM) data by YCharts
Despite this ramped-up capex spending, Waste Management remains FCF positive, returning $283 million in dividends and $370 million in stock buybacks to its shareholders during the third quarter. Once these capex investments mature and start generating cash, management expects to generate around $4 billion in FCF annually by 2027.
Best-in-class profitability
In addition to this advantage from monetizing the by-product of its core collections business, Waste Management has historically held higher return on invested capital (ROIC) figures than its two most prominent peers.
WM Return on Invested Capital data by YCharts
Measuring the company's profitability to its debt and equity, Waste Management's 10.5% ROIC shows that it is the best in its industry at reinvesting in its business. It also easily outpaces the company's weighted average cost of capital (WACC) of 7.4%, making me optimistic about the company's ongoing RNG investments.
In fact, its ROIC has consistently been above its WACC even as it has made over 88 acquisitions since 2018 -- leaning on these tuck-in acquisitions to grow. This 3.1% gap between ROIC and WACC demonstrates Waste Management's ability to create value for shareholders by picking up smaller peers and successfully integrating their operations into the company.
Why Waste Management makes sense right now
With an enterprise value-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio of 15, Waste Management trades close to the average valuation for industrial stocks in the S&P 500. Yet its strong ROIC, leadership position, and investments in RNG infrastructure give it market-beating potential.
Finally, the company is home to a dividend yield of 1.6%, using only 47% of its net income for that purpose. Its share count has also declined by 13% over the last decade. Powered by this commitment to returning cash to its shareholders and outstanding operational performance, Waste Management looks like a great business trading at a fair price -- leaving it poised to beat the Dow Jones over the long haul.
