Waste Management's (NYSE: WM) stock never belongs in your rubbish pile.

Just recently, my fellow Fool Alyce Lomax made a strong case for the garbage handler, highlighting its efforts not only to collect people's waste, but also to find ways to reuse and recycle what we throw away.

But just because I think you shouldn't overlook this stock doesn't mean I'm ready to buy it. As a value-obsessed investor, I tend to be very price-conscious. Is Waste Management's stock a good deal right now? Let's take a closer look.

Earnings expectations
As I outlined in a previous article, combining Wall Street analysts' expectations and previous annual growth can yield a solid baseline for a company's growth expectations.

Type of Recorded/Projected Growth

Annual Growth Rate

Analysts' estimates 10.3%
10-year historical 1.8%
5-year historical 1.7%
3-year historical (2.6%)
Last 12 months 4.6%

Source: Capital IQ, a Standard & Poor's company. Historical growth based on operating earnings.

First, I need to note that the historical numbers and analyst estimates aren't exactly apples-to-apples, because analysts typically work from earnings-per-share growth.

Over the past decade, Waste Management has reduced its share count by roughly 2.5% per year. Fewer shares outstanding leave more profit for each individual share. So if we assume that the company continues to buy back shares, we can jack up its growth rate. Of course, even if we do that, there's still a gulf between what analysts are projecting and what the company has actually delivered.

For my model, I set my upside case at 8% -- right between analysts' estimates and historical performance. My midcase is closer to historical performance at 5%, while my downside case is 1% per year.

Pinning down valuation
Valuations are a moving target that can be tough to predict, but as with growth above, using a range of values can give us a view of our potential returns without requiring Miss Cleo-type prescience.

In creating our range, we can start with the stock's current price, then examine its historical trading range. Right now, Waste Management's stock changes hands at roughly 19 times trailing earnings. That's on the high side for the stock, which has ranged between 15 and 20 for much of the past decade.

For broader context, we can also look at how similar companies trade.


Forward P/E

Estimated Growth

Republic Services (NYSE: RSG) 16.3 10%
Stericycle (Nasdaq: SRCL) 31.9 16%
Clean Harbors (NYSE: CLH) 30.1 16.5%
Iron Mountain (NYSE: IRM) 27.1 15%
Pitney Bowes (NYSE: PBI) 10.2 NA
Cintas (Nasdaq: CTAS) 18.9 10.2%

Source: Capital IQ, a Standard & Poor's company.

Since there's not exactly a huge group of waste-management companies trading publicly, I added in a few companies here that have similar but more general businesses. While Iron Mountain, Pitney Bowes, and Cintas may labor in the professional / industrial sector, we may still be able to glean something from the way investors value their stocks.

How does Waste Management stack up? Its forward earnings-per-share multiple of 16.4 looks cheap compared to most stocks in this group. However, the analysts' 10% growth estimate for Waste Management notably lags most of the other stocks here. Even Cintas, which has a higher multiple and lower expected growth rate, may have the opportunity to grow faster than anticipated as it recovers with the economy. And as I noted above, I'm not convinced that Waste Management can live up to Wall Street's estimates.

For my model, I assumed that Waste Management's trailing multiple actually falls a bit to 17. On the upside, I could see it climbing to 20, and on the downside, I wouldn't be shocked with a multiple of 14.

Dividends and share count
Our final stop is to consider how much we'll get paid through dividends, and whether changes in share count will impact our bottom line.

What worries me most about share count is that a company will issue boatloads of shares and dilute my ownership stake. Obviously this isn't the case with Waste Management, as we've already covered the fact that it has consistently reduced its share count.

As for dividends, Waste Management did go through a dark time right around the turn of the millennium, reducing its payout to a mere $0.01. Since then, though, the company's gotten back on track. Over the past five years, it's averaged dividend growth of 10.6% per year.

So can we assume that dividends can grow faster than earnings? I think so. With a payout ratio of 64%, Waste Management does have room to keep the pedal down on its dividends. However, the longer that is the case, the stickier the situation will get as that payout ratio creeps higher.

I assumed that dividend growth in the three cases would clock in at a respective 12%, 10%, and 8%.

The verdict, please!
The end result of all of this is the returns we can expect under the various scenarios. Here's what my three scenarios would look like.


Annual Earnings-per-Share Growth

Earnings Multiple

Annual Dividend Growth

Expected Annual Returns

Upside 8% 20 12% 13.1%
Mid-case 5% 17 10% 7.2%
Downside 1% 14 8% 0.3%

Source: Author's calculations.

These aren't terribly impressive results. In order for me to get excited about a stock, I normally like to see returns exceeding 12% in the mid-case scenario.

So does this mean that I started with a bad assumption, and that Waste Management is a garbage stock? Not at all. Given the company's reliability and healthy dividend, some investors may still be attracted, despite the lower return. As for me, it simply means that I'm going to stay on the sidelines, keep my eye on the stock, and hope that there's an opportunity to buy it at a lower price.

Of course, the future is an ever-changing picture. You need to keep on top of Waste Management's latest developments to see which set of numbers the company and stock will live up to. You can do just that by adding the stock to your Foolish watchlist. Don't have a watchlist yet? Start one by clicking here.

The Motley Fool owns shares of Clean Harbors and Waste Management. Motley Fool newsletter services have recommended buying shares of Stericycle, Waste Management, Republic Services, and Cintas. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Matt Koppenheffer does not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.