Waste Management (WM 0.67%) is flexing this week. Unfazed by the uncertain economy, the resilient trash, recycling, and natural gas business announced a 7.1% increase to its quarterly dividend rate and authorized $1.5 billion for share repurchases.
"The strong and consistent cash flow generation of our business allows WM to continue to fund all our capital allocation priorities," said Waste Management CEO Jim Fish in a press release on Monday.
Here's a closer look at WM's capital return program and why the company is confident enough to pay out even more capital to shareholders -- both directly and indirectly.
NYSE: WM
Key Data Points
Returning cash to shareholders
WM's boosted dividend comes in at $0.75 per quarter, up from $0.70. This translates to $3 annually, giving the stock a dividend yield of 1.6%. Notably, this dividend yield currently exceeds the S&P 500's dividend yield of about 1.5%.
Long-term WM shareholders have been rewarded with an extended stretch of dividend growth. The company's latest increase marks the company's 21st consecutive year of dividend increases. More importantly, dividend growth should persist in the coming years. WM's payout ratio, or its trailing-12-month dividend payments as a percentage of earnings, is less than 50%. This means there's plenty of wiggle room for further increases, even if the company's earnings growth stalls.
Further, when paired with WM's steady and reliable cash flow stream, a payout ratio this low gives WM enough flexibility to return cash to shareholders in more ways than one. WM also said on Monday that it is refreshing its share repurchase authorization, announcing a new authorization of $1.5 billion to replace its previous $1.5 program. If the waste management specialist keeps up its current pace of buybacks, it will likely repurchase more than $1 billion worth of stock (management said it repurchased a total of $1.3 billion in 2023). A repurchase program this substantial will put a nice dent in share count over time, as WM's current market capitalization is just over $71 billion.
A resilient growth story
Fortunately, there's good reason to expect robust earnings and free cash flow growth from WM in the coming years. Signaling its growth aspirations to investors, the company changed its name from branding from its official name of Waste Management to just WM in 2022 as it is increasingly aiming to be much more than a waste company. WM has been making substantial investments in renewable natural gas (RNG) production -- created using processed biogas collected from its sprawling landfill network -- which is utilized by its fleet of trash trucks and, in some cases, converted into electricity.
"Our seventh renewable natural gas plant and the third of 20 facilities in our growth program is expected to be in service in January," said Fish in the company's third-quarter earnings call in late October. "And we have another four facilities on track for completion in 2024, including two of the largest projects in the portfolio, Fairless in Pennsylvania and Orchard Hills in Illinois."
Of course, this budding RNG operation is underpinned by the company's core waste business, which is arguably among the most resilient and reliable business models in the world.
Over the next five years, the current consensus analyst forecast calls for WM's earnings per share to compound at an average rate of 10% annually. And given the company's history of achieving steady top-line growth with its collection business and its nascent RNG business, this forecast seems achievable.
Altogether, WM's resilient business, latest dividend increase, and expected robust earnings-per-share growth over the next five years make the stock look attractive at its current valuation of 31 times earnings.
