Waste Management (WM -0.68%) announced fourth-quarter financial results on Feb. 18. The trash collection titan delivered strong profit growth and excellent cash flow generation, even as sales were sluggish.
Revenues fell 5.6% to $3.25 billion, mostly because of divestitures, with foreign currency movements and lower recycling and fuel charge revenue also contributing to the decline.
Overall volume decreased 0.9% in the fourth quarter, as the company continues to hold firm on pricing to protect its margins. But that represents a sequential improvement from a decline of 1.4% in the third quarter, with internal revenue growth from volume in Waste Management's traditional solid waste business turning positive in the fourth quarter.
"We saw improving volume trends across our industrial and commercial lines of business," said CEO David Steiner in a press release. "We are encouraged by the positive momentum we are seeing in these volumes and expect them to continue to improve throughout 2016."
Management's pricing discipline was also apparent in the 4.2% improvement in core pricing relative to the year-ago period, which helped drive a 1.7% year-over-year increase in internal revenue growth from yield for collection and disposal operations.
However, low commodity prices remain troublesome, with average recycling commodity prices down 18.6% compared with the prior-year period. In addition, recycling volumes decreased 1.6% in the fourth quarter. But operational improvements were able to offset these declines.
Excluding divestitures, operating expenses as a percent of revenue improved 80 basis points to 62.4% in the third quarter, as lower fuel costs, reduced commodity rebates, and continued route optimization boosted results.
That helped net income -- adjusted to exclude asset impairment, restructuring, and other non-recurring charges -- rise 15% year over year to $320 million. And adjusted earnings per share, boosted by share buybacks, jumped 18% to $0.71.
Waste Management's cash generation also remained strong in the fourth quarter, with net cash provided by operating activities totaling $526 million and free cash flow coming in at $188 million. That allowed Waste Management to return $172 million to shareholders via dividends during the quarter.
Management issued its 2016 outlook, including:
- Adjusted earnings per share in the range of $2.74 and $2.79, representing a year-over-year increase of about 6% at the midpoint.
- Total operating EBITDA (earnings before interest, taxes, depreciation, and amortization) of approximately $3.6 billion, an increase of 5% from the prior year.
- Free cash flow of between $1.5 billion and $1.6 billion, up from $1.4 billion in 2015.
It's this robust cash flow generation that makes Waste Management such a reliable income investment. The company has more than a decade of consecutive annual dividend increases, and management expects to continue to boost the payout in the years ahead. With a forward annual dividend yield of about 3%, and plans to buy back $1 billion in stock in 2016, Waste Management offers investors an attractive shareholder yield of nearly 7%.
If earnings growth can exceed 5%, Waste Management shareholders could be in store for total returns on the order of 12% in the year ahead. For arguably one of the lowest-risk businesses available in the market today, that's an attractive potential reward that investors may wish to consider.