The Wall Street adage says “never try to catch a falling knife” or some variation of that. In other words it isn’t always the safest bet to buy a stock on its way down. What if that stock has an attractive and sustainable yield that has become even more attractive? In certain cases the yield becomes a floor for the stock.
Such may be the case for shares of Waste Management (WM), the nation’s largest trash collector and processor. Waste Management reported earnings last week that were not terrible, but they weren’t good either. The company lowered its full year guidance which is what really upset the street. Subsequently shares have tumbled more than 10% since the announcement.
In the second quarter, net income fell to $ 236 million or $ 0.50 per share. Analysts were expecting $ 0.52 per share. Revenue was better than analyst’s expectations at $ 3.35 billion versus the $ 3.3 billion expected. However, higher operating expenses ate away at the company’s bottom line. Second quarter operating expenses rose 7.2%. Management lowered full year guidance to earnings of $ 2.14 – $ 2.18 per share, citing higher costs and lower trash volumes. Analysts had expected earnings of $ 2.27 per share.
Trash volume tends to coincide with the ups and downs of the overall economy and management doesn’t foresee much improvement through the end of 2011. The company has begun cost-cutting moves that along with higher prices should cushion earnings.
Waste Management has been acquiring smaller, private garbage operators over the last several years. Growing by acquisition hasn’t stopped. Waste Management announced alongside earnings that it is acquiring Oakleaf Global Holdings for $ 425 million.
The sell-off in shares of Waste Management seems overdone. The stock, trading near $ 36 prior to the earnings release, now changes hands at around $ 31.50.
After the sell-off Waste Management has a 4.3% dividend yield, making this stock fall into the high-yield category. The current P/E ratio is less than 16 and the projected P/E is less than 14.
Revenue and earnings have remained flat over the last five years. The company has increased its dividend yield at an annualized rate of 4.3%. Waste Management returns 68% of cash flow to shareholders through its dividend. Despite growing through acquisition, management says that the dividend is safe.
Despite lower trash volumes, Waste Management has plenty of room to grow. The company is focusing on recyclables, which it in turn resells. Rising commodity prices have increased margins on recycling. By acquiring smaller rivals it is reducing competition and growing future volumes.
The yield provides a nice floor for the stock price. The fact is, trash isn’t going away no matter what shape the economy is in. With a now lower P/E and an excellent yield, Waste Management is a good long-term holding. This is one stock you don’t want to throw out with the trash.
Disclosure: I am long WM.
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