Waste Management’s Dividend Well-Covered with Free Cash Flow

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By Brian Nelson, CFA

We continue to be huge fans of the garbage-collection business. In fact, we cannot remember a time when we didn’t like the waste collection space. The group benefits from a relatively recession-resistant pick-up operation, and transfer and disposal assets that simply demand pricing power. The trash-taking industry is also notorious for its free-cash-flow generating prowess, and we don’t think that will ever change. The latest data point as it relates to the health of the waste industry, and perhaps the general economy as well, came with Waste Management’s (WM) third-quarter results, released October 23.

The company’s revenue advanced 3.8% thanks in part to strong all-in organic sales expansion in its collection and disposal operations (up 5.3%), and landfill pricing increases of 3.7%. Cash flow from operations surged 8.9% during the period, while free cash flow came in at $478 million, significantly higher than the $218 million of dividends it spent in the third quarter. Waste Management boasts a very solid Dividend Cushion ratio of 1.7x, and we continue to expect ongoing expansion in the payout. Here’s what we have to say about its dividend in the company’s Dividend Report: 

We love Waste Management’s business model. The company’s asset base is quite diverse, and garbage pick-up and disposal will continue to be a necessary service, no matter what the future may hold. Its landfill operations boast significant barriers to entry due to regulatory requirements and stiff NIMBY (not-in-my-backyard) opposition. The collection side of its residential business is generally recession-resistant, though volatile commodity prices can cause swings in recycling revenue. In light of Waste Management’s utility-like status, we give the company an extra boost in the calculation of its Dividend Cushion ratio. The company’s net debt position is ominous, but we rate its ‘Dividend Safety’ as GOOD for now.

As it relates to a read-through on the health of the economy, management emphasized that it continued to experience strong growth, “particularly in the segments of (its) business that reflect the resilience of the consumer.” On the conference call, CEO James Fish noted that it has “good visibility” into the lines of business driven by the “consumer portion of the economy (commercial collection and MSW landfill volumes),” noting that “all indicators are pointing to continued strength.” Waste Management did, however, note that the “portion of (its) business, driven by the industrial segment of the economy…the pace of growth is starting to moderate.” Waste Management remains confident, nonetheless, as evidenced by its willingness to pursue M&A, with the pending acquisition of Advanced Disposal Services.

Concluding Thoughts

Waste Management is one of our favorite companies in our coverage universe, and the strength of its dividend is undeniable. The company’s operations have performed quite well during the first nine months of 2019, and the executive team expects the momentum to continue into 2020. Management did express some caution as it relates to its industrial segment revenue but reiterated strength in consumer activity, and noted that, while its recycling (commodity-sensitive) business isn’t as strong as it originally expected, it expects to achieve its “guidance range of adjusted operating EBITDA of $4.4-$4.45 billion, free cash flow of $2.025-$2.075 billion, and adjusted earnings per diluted share of $4.28-$4.38.” Shares of Waste Management yield 1.8% at the time of this writing.