Key Risks
WM’s revenue growth is somewhat impacted by the amount of goods consumed by consumers and businesses. When economic activity slows, less trash is produced and WM is not as busy. However, its trucks still run their routes and incur the same operating costs, somewhat crimping profitability.
Besides economic activity, solid waste volumes are gradually impacted by more efficient product packaging and the level of recycling activity, which diverts trash away from landfills.
Landfills have also received increasing scrutiny from governments regarding their impact on the environment, further accelerating the trend towards recycling and what are known as waste-to-energy (WTE) plants, which generate electricity from waste and sell it to customers such as utilities.
Importantly, WM is the largest residential recycler in North America and has the financial firepower to invest in whatever operations are needed to maintain its moat. The company is also a leading renewable energy provider.
If anything, we think the (slowly) increasing shift towards recycling and renewables will further strengthen the market positions of the biggest players because smaller competitors are unable to make the vertical integration investments needed to compete.
Whether or not these activities will be equally profitable is another question, but WM should find a way to stay relevant with its scale and collection of assets.
Additionally, lower commodity prices are hurting WM’s recycling operations (9% of sales). While not much can be done about this in the near term, WM is structuring new contracts and renewals to help it better deal with price volatility in the future and is improving operational efficiency.
WM’s management team is focused on improving the company’s return on invested capital, and we trust them to make the best decisions possible as it relates to recycling and WTE activities, which seem to have a more volatile return profile.
The company decided to divest a meaningful portion of its WTE business in late 2014 for $1.9 billion to maximize its focus on the core business, reduce earnings volatility, and improve its returns. We expect management to remain conservative with how they run the business and adapt to evolving waste management trends.
Dividend Analysis
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. WM’s long-term dividend and fundamental data charts can all be seen by clicking here.
Dividend Safety Score
Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
Waste Management, Inc. (NYSE:WM) has one of the safest dividend payments that income investors can find. The company recorded a dividend Safety Score of 97, suggesting that its dividend is safer than 97% of all other dividend stocks in the market.
Over the last four quarters, WM’s earnings and free cash flow payout ratios were 66% and 56%, respectively. For such a stable and predictable company like WM, these ratios are healthy and appear to pose little risk.
Looking further back, we can see that WM’s payout ratios have increased a bit over the last decade, but not by an extraordinary amount. In most years, the company’s payout ratios remained between 40% and 60%, leaving WM with plenty of dividend cushion and room for incremental growth.
Source: Simply Safe Dividends
Source: Simply Safe Dividends
