Waste Management (WM) lifts dividend by 4%, but stock is overvalued.

Waste Management’s (NYSE:WM) dividend was increased by 4%.  Its overall yield is 2.35%. The firm started paying a dividend in 1998.

Waste Management is one of the largest waste management environmental service firms in the United States. It provides waste management services to residential, commercial, industrial, and municipal customers throughout the country. The firm owns 243 solid waste landfills and 5 secure hazardous waste landfills.  It provides commodities recycling services as well, which entails selling recyclables to third parties. The company was founded in 1987 and is headquartered in Houston, Texas.

Waste Management has maintained a three-year growth rate of dividends of 4.4 percent. Waste Management currently ranks 1st in dividend yield within the large cap industrial goods, waste management category. The quarterly dividend for the March payment will be $0.425 versus the prior year rate of $0.41 per share. Waste Management is not a member of our Top 100 Dividend Stocks.  (see below).

The dividend will be paid at the new higher rate on March 24, 2017, to shareholders of record at close of business on March 10, 2017. Waste Management Inc. is currently priced at $72.74. Listed in the table below are the quarterly dividend payments since 2010.

Date Quarterly Dividend
3/10/2017 0.425
11/30/2016 0.41
9/7/2016 0.41
6/1/2016 0.41
3/3/2016 0.41
12/2/2015 0.385
9/10/2015 0.385
6/3/2015 0.385
3/5/2015 0.385
12/3/2014 0.375
9/3/2014 0.375
6/4/2014 0.375
3/6/2014 0.375
12/2/2013 0.365
9/4/2013 0.365
6/5/2013 0.365
3/7/2013 0.365
11/26/2012 0.355
9/5/2012 0.355
6/6/2012 0.355
3/7/2012 0.355
11/28/2011 0.34
9/1/2011 0.34
5/31/2011 0.34
3/9/2011 0.34
11/29/2010 0.315
9/2/2010 0.315
5/27/2010 0.315
3/1/2010 0.315

Analysis of Waste Management is based upon our five key criteria for the Top 100 list, which include;

Category Value Score
Dividend Yield 2.35% 232
Dividend Growth (3-7 year avg) 4.4% 313
Forward P/E 23.01 220
S&P Financial Rating A- 120
Beta 0.75 75
Total Score 960
% Yield 3 Year Div. Growth Rate 7 Year Div. Growth Rate SPS 2016 P/S Ratio 10 yr P/S Low 10 yr P/S High 5 yr low Yield % 5 yr max Yield %
2.35% 4.4% 4.4% 33.75 2.14 1.35 2.40 2.24% 4.54%

Positives;

  • Waste Management has paid out a dividend consecutively for the past 19 years.
  • Waste Management maintains an investment grade rating of A-.
  • Waste Management’s dividend yield is above that of the S&P 500 Index.
  • Waste Management maintains a beta of 0.75, lower than the average company.

Negatives;

  • Waste Management is trading above its ten-year average price/sales (P/S) ratio.
  • Waste Management’s current dividend yield (2.35%) is lower than its five-year average historical dividend yield and the all-time high of over 4%.
  • Waste Management’s payout ratio has actually declined.

Latest Earnings & Overall Analysis:

Waste Management issued its earnings data on February 16th. The company reported $0.75 EPS for the Q4 quarter, missing the consensus estimate of $0.77 by $0.02.  Total revenue for Q4 rose 6.6% to $3.46 billion.  The firm posted a profit of $335 million, from $273 million, or $0.61 cents a share a year before.  Average prices of recycled commodities rose  by over 30% in the Q4. Recycling volumes also rose by 2.5%.  For 2017, the company projects earnings per share to be between $3.14 a share and $3.18 a share. This is slightly below most analyst estimates.

The firm heavily relies upon waste volume and pricing to grow the firm’s revenue and earnings. Waste volume continues to grow at a healthy pace. It was up 1.5% for 2016, which continues upon its consistent profile of low single digit growth. The fact is that the firm grows steadily with GDP growth. More growth and people, the more trash to be hauled away. Along with pricing increases, it makes the firm much like a utility.

Another strong benefit for the firm is recycling.  After years of weak growth in the area, 2016 results to earnings saw an uptick. Commodity recycling prices for the firm rose by nearly 9% overall as volumes grew by almost 1%.  Prices have continued to rise going into the new year.  The firm is also continuing on its cost cutting program within the recycling area where expenses fell by  2.5% last year. Earnings per share should rise from $2.91 to about $3.15.  Management expects free cash flow to come in at $1.6 billion, the same as last year.  With its free cash flow, the company repurchased over $700 million in company shares in 2016 while also paying out dividends of $726 million.  This should continue for 2017.

The firm has a strong monopoly along with Republic in the waste management category. Its large holdings in landfills makes the firm a very strong player in the industry along with its already established network of collection routes. This business is not easily replicated, or would be very expensive to enter and gain share.  Its prominent focus over the past few years has been on maximizing its core waste business profitability and generating strong free cash flow.

Its recycling business is variable, as the last few years have demonstrated. Although this seems to be finally turning positive as global growth picks up, it is not the firm’s bread and butter. Although it has exposure here cyclically, it has reduced its overall commodity exposure.  Waste Management’s future seems bright given its status as a top player in its industry. , and its prospects for the future seem strong. 2016 was a banner year for the company, featuring increased volumes, improved performance of its recycling unit, and record free cash flow and EBITDA. Plus it even pays a 2.3% dividend. Investors should feel secure about making an investment in this company.

2016 2015 2014 2013 2012
Earnings per Share 2.91 2.53 2.48 2.15 2.08
Annual Dividend 1.64 1.54 1.5 1.46 1.42
Payout Ratio 56.36% 60.87% 60.48% 67.91% 68.27%

The issue for dividend investors is price at this point in time.  As with many attractive dividend companies, the price of WM has advanced from $46 a share in April 2015 to $72 today. Thus the price rise has been faster than dividend hikes, resulting in a current yield of 2.3%  This is far below the 4% plus yield earned two years ago at lower prices. Its price/sales ratio is now above 2, indicating a stretched valuation. It current trades at 23 times expected 2017 earnings. Its payout ratio has also actually declined, as the firm has increased earnings beyond dividend rises.

Earnings per Share 2017 (projected) 3.15
Dividend 1.7
Payout Ratio 53.97%
Based on the firm’s elevated P/S ratio, forward P/E ratio, and below average dividend yield, Waste Management Inc. does not qualify as one of our Top 100 Dividend Stocks
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Waste Management Inc. Dividend Yield Historical Chart (Click to enlarge)

Chart Explanation:  Dividend growth stocks may be viewed undervalued when the current yield is above historical readings for the past 5 years. 

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