Companies in the municipal solid waste sector are well-known for their cash-flow generating prowess and relatively stable operating performance. As outlined in this waste industry primer, a trash-taker’s residential collection operations are on a service-based model (not-volume based) and help to mitigate cyclical pressures in other economically-sensitive lines of their business (industrial roll-offs, etc.).
Further, cell-by-cell landfill development provides additional flexibility with respect to capital outlays, as rubbish handlers can scale back expenditures during troubled economic times, bolstering free cash flow. Such consistent, cash-rich business models have translated into a nice flow of dividends, particularly at the largest two domestic players, Waste Management (WM) and Republic Services (RSG).
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With corporate bond yields at relatively unattractive levels compared to other asset classes and concerns about a double-dip recession coming back into vogue — check out the recent ADP jobs report and ISM manufacturing index — allocating a portion of your portfolio into a stable high-yielder in the waste sector seems like an attractive long-term option.
As the table above reveals, one can capture the best dividend yield with Waste Management, but likely participate in the greatest dividend growth via Waste Connections (WCN), which recently initiated a quarterly payout. Investors should expect a dividend hike at Republic Services later this year and continued convergence to Waste Management’s elevated payout ratio of nearly 70% over time. All three players are undervalued on a discounted cash-flow basis, with Republic offering the greatest opportunity for capital appreciation among the three, in my opinion.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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