Inside Wall Street: Clean side of Waste Management
This garbage disposal company is catching the eye of 'green' investors.
Waste Management (WM), the largest U.S. trash hauling and disposal company, is attracting new investors looking for defensive stocks that not only pay attractive dividend yields but are environmentally conscious.
"We bought shares in Waste Management mainly because it has made substantial investments in clean energy and waste-to-energy facilities," says Joseph F. Hunt, a principal at Northwest Criterion Asset Management, which is focused on a deep-value investment strategy. He notes that WM's focus on integrated solutions will result in greater profitability.
WM not only collects waste but disposes and recycles it. The company controls the collection and disposal of residential, commercial and industrial waste. It owns almost 300 landfill sites and provides an integrated system to haul and dispose of waste. Environmental concerns and the permit process are keeping a lid on the number of landfills available nationwide, giving WM "great competitive advantage," says Hunt. WM also operates 20 waste-to-energy plants.
Recognizing WM's efforts and innovative approach, the Environmental Protection Agency last year named the company "Industry Partner of the Year." Hunt argues that WM is definitely a "green" company with its emphasis on conservation and energy independence.
WM has extended its footprint as far as China, where it has formed a joint venture with Shanghai Environmental Group in the waste-to-energy business. It has four of eight such plans operating in Shanghai. "That provides a huge opportunity for growth in China for WM," says Hunt.
Last year, WM acquired Oakleaf Global Holdings, the largest third-party provider of waste disposal services in North America, with more than 2,500 haulers serving 800 customers. The integration of Oakleaf should greatly expand WM's revenues -- and footprint in the U.S.
WM has more than 1,400 trucks that run on natural gas, and also operates 17 natural gas fueling stations to save on energy costs.
For many investors, WM's hefty dividend yield of 4.13% is more attractive than low-paying bank savings accounts. The company has increased dividend payments for nine years in a row. The payout's growth rate in the past five years is 9%.
WM has not been a runaway stock, trading at a price-to-earnings multiple of 15, which is equal to its five-year average. Now at $33 a share, Hunt estimates the stock is worth $40, which is about 16 times his 2013 earnings estimate of $2.50 a share. WM earned $2.04 last year.
Standard & Poor's Capital IQ recently upgraded WM to a "buy" from a "hold" rating, based on its view that commercial and industrial waste volume will gradually recover as the macro-economic picture improves. "We also expect WM to continue with its expansion strategy and waste-to-energy ventures, generating strong cash flow for 'tuck in' acquisitions, share buybacks, and dividends," says Stewart Scharf, S&P Capital IQ analyst.
He expects organic revenue growth to be driven by higher core collection and disposal pricing, especially in the second half of 2012, even as volume improves only moderately and as lower commodity recycling prices negatively impact results in the first half.
For 2012, Scharf estimates WM will earn $2.30 a share, followed by 11% growth to $2.55 in 2013. His stock price target for the next 12 months is $40 a share.
So for investors seeking a green stock that is also a defensive investment in tough economic times, and has an enticing dividend yield to boot, Waste Management is it.
Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.
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