Income investors typically look for solid companies with high, sustainable yields. Fortunately, good companies with these criteria tend to overlap with what can be defined as value stocks. Value is in the eye of the beholder however. Waste Management’s value lies not in high growth prospects, but in an unbeatable business model and a great history of dividends. Intel’s value lies in the ability to innovate, along with a cheap valuation compared to its historical average. Additionally, Intel is one of the higher yielding tech stocks out there.
Waste Management (WM): Waste Management is the largest trash collector and disposer in North America. Its main competitor is Republic Services (RSG). Waste Management currently yields 4.2%, and they have increased their dividend at a rate of 9.10% per year over the last five years, which has far exceeded inflation. Though WM’s revenues and earnings have stayed essentially flat over the last several years, 2011 has been a very solid year for them. After a solid 1st half, the company maintained guidance of $ 2.24 to $ 2.30 in earnings per share, and cash flow between $ 1.25 to $ 1.35 billion. At $ 2.27, the midrange of guidance, Waste Management’s shares would be trading at 14.7 times earnings (based on an August 30th share price). Based on free cash flow of $ 1.30 billion and their current dividend of $ 1.36, WM’s real payout ratio is a very sustainable 47.5%. As WM further matures, this ratio will increase as steadily as it has for the last several years.
The real long term value in Waste Management lies in its predictable business operations, pristine business model, and its position to take advantage of several upcoming catalysts. One of these catalysts is the severe decline in the number of landfills in the United States. As the country’s largest private holder of dump sites, an uptick in revenues will occur due to the company’s ability to charge larger fees to dump in their held properties. Smaller players in the waste cleanup industry will suffer from this change. Additionally, Waste Management is currently investing in natural gas trucks, which will help reduce energy costs as the price of natural gas is significantly less volatile than that of crude. Waste Management appears likely to increase free cash flow at a rate quick enough to keep their dividend yields strong and growing.
Intel (INTC): Not seen in some time, the broad market sell-off has allowed investors the opportunity to pick up shares of Intel with a dividend yield of 4.2%. While dividend growers typically have very predictable and consistent operating successes, the nature of Intel’s business is inherently seasonal and cyclical. Despite this difference, Intel has been growing their dividend yield at a rate of 16% per year, which includes a whopping 33% increase from last year. The absolutely best thing about Intel’s yield? The payout ratio. Based on earnings, the ratio is a paltry 29%, and on free cash flow, is about 62%. Intel historically trades at about 20 times earnings; INTC is currently trading at half its historical P/E. Investors have worried about Intel’s reliance on the strength in personal computer sales, but fears are moderately overblown and far too concentrated. Intel has had a difficult time picking up share in the tablet and smart phone space, as their current technology is admittedly inferior.
Due to Intel’s massive stature and resources, however, they have been able to acquire Infineon’s wireless chip business, and their top of the line R&D department has announced several new plans to improve upon existing technology. Additionally, Intel purchased McAfee security systems, and they can now integrate security directly into the chips they already manufacture. Intel will find new ways to strategically allocate capital at the shareholders’ benefit, and management has shown themselves to be very willing to pay out large portions of what would otherwise be retained earnings. Intel is a fantastic company trading at a historical discount, with an enviable yield.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author has both WM and INTC at the top of his watchlist, and may open a position in either stock at anytime, not including the next 72 hours.
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