Waste Management, Inc. (WM): An Excellent Moat and 13 Years of Consecutive Dividend Increases

Dividend Growth Score

Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.

WM’s dividend Growth Score is a little below average at 43. While the company has consistently increased its cash flow generation and dividend, it operates in mature, slow-growing markets. The company’s payout ratio is also north of 55%, which is still healthy but provides a bit less room for dividend growth than many other companies, especially considering the amount of debt on the balance sheet.

WM increased its dividend by 6.5% in December, making its thirteenth consecutive year of dividend increases. While it is only about halfway to joining the list of dividend aristocrats, WM has the predictable and durable business model needed to keep chugging along.

As seen below, WM’s dividend growth had been decelerating over the past decade until its announced increase earlier this month. We expect low- to mid-single digit dividend growth to continue, essentially matching the company’s earnings growth rate.

Source: Simply Safe Dividends

Valuation

Waste Management, Inc. (NYSE:WM) trades at 19.6x estimated 2016 earnings and offers a dividend yield of 2.8%, which is significantly below its five year average dividend yield of 3.6%.

With an expected long-term earnings growth rate in the low- to mid-single digits, we believe the stock offers total return potential of 6% to 9% per year.

WM doesn’t appear to be a bargain for new money today, but we think the company’s impressive durability and moat make it worth holding onto – especially for investors living off dividends in retirement.

We expect to be rewarded with steadily improving earnings and growing dividend payments for years to come.

Conclusion

WM is a rock solid business. The company’s economies of scale, extensive network of well-placed assets, ownership of increasingly-rare landfills, annuity-like revenues (the average commercial and industrial customer stays with WM for 10+ years), and disciplined approach to capital allocation create a strong fundamental case to buy and hold WM forever. It’s no wonder why Bill Gates’ trust has made WM its third largest holding and also owns about 25% of WM’s next largest competitor, Republic Services (RSG).

We expect WM to continue improving its profitability over the coming years and rewarding shareholders with additional, albeit modest, dividend increases. For these reasons and more, we own WM in our Conservative Retirees dividend portfolio and don’t plan on selling anytime soon.

Disclosure: None