Waste Management (NYSE: WM) provides transfer, recycling, and disposal services for the residential, commercial, industrial, and municipal sectors within the United States, where it also operates waste-to-energy and landfill-gas-to-energy facilities.
Today, let's look at three things investors should be watching regarding Waste Management, as they'll provide us better insight into the company.
1. Green energy initiatives
There are few companies out there doing as much to help the environment as Waste Management. That's a bit of an oxymoron considering that Waste Management operates dozens of landfills, but it's what steps the company has taken with the trash prior to and after it hits those landfills that's important.
Waste Management is the largest recycler in the U.S. and is able to use other people's trash to add to its bottom line. Metal prices will somewhat determine how profitable its metal recycling segment is, but recycling of any form helps drive down costs and eliminate harmful products from re-entering the environment.
Also important is Waste Management's use of landfill gas, which it uses to generate about 550 megawatts of electricity and power about 440,000 homes. The company's plan is to double this electrical output by 2020. In addition to powering homes, Waste Management has also devised technology capable of using this gas to fuel some of its vehicles. Clean and cheap energy is one major factor to Waste Management's future success.
2. Industry consolidation
One advantage Waste Management has over its competitors is its sheer size. Having such a large company and possessing green technologies to a scale far beyond its peers allows it to command significant pricing power when it comes to disposing of trash. One aspect that could thwart that dominance is industry consolidation. Therefore, it's imperative to keep an eye on Waste Management's peers.
Republic Services (NYSE: RSG) is Waste Management's largest competitor, and it became so by purchasing Allied Waste (then the third-largest waste services company) in 2008. Similarly, Waste Connections (NYSE: WCN) purchased Alaska Waste Company earlier this year and announced that it had positioned its balance sheet in the first quarter for an increase in acquisition activity. This is a sector where being bigger means better pricing power, and waste-management companies will look to grow as large as regulators will allow.
3. Dividend growth
I know I might sound like a broken record with telling investors to keep their eyes on the payout prize, but it makes a lot of sense in regard to Waste Management.
One major aspect of the waste-services sector that can't be ignored but I've yet to touch on is that it's a necessary service. There will always be trash and therefore always a need for Waste Management's disposal and transportation services. What this means is that Waste Management's cash flow will always be fairly predictable even though its growth expectations will be somewhat tempered by its size and the amount of trash produced. That's why it's important to keep an eye on Waste Management's dividend growth.
Source: Dividata.
*Assumes quarterly payout of $0.36 for remainder of fiscal 2012.
Since paying out just $0.01 in 2003, Waste Management's dividend growth has exploded, and the company currently pays out a 4.3% yield. Although it isn't the highest yield in the sector, I consider it the safest.
Veolia Environnement (NYSE: VE), a top pick of Foolish colleague Brian Stoffel, slashed its payout earlier this year and is targeting a 7.35% yield through 2013. However, international pressure could continue to challenge its dividend.
Keeping an eye on Waste Management's dividend growth is the final key to understanding this company.
Foolish roundup
Now that you know what to watch for, it should be easier to analyze Waste Management's successes and pitfalls in the future, and with any luck you'll gain a competitive investing edge.
If you're still craving even more info on Waste Management, I would recommend adding the stock to your free and personalized Watchlist so you can keep up on all of the latest news with the company.
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