There are only a few investments out there now that deserve your trust. But Waste Management (WM) is one; even Bill Gates trusts this company enough to own 6% of it. Waste removal is a critical component to any society. And Waste Management is poised for very strong capital gains and pays a consistent dividend quarterly.
Waste Management is the largest waste disposal company in North America. In 2010, it served nearly 20 million customers through 294 transfer stations and 271 landfills.
The company is by no means just about trash pickup though, as they do everything: managing landfills (18% of revenues), selling recycled materials (9%), transferring waste (10%), and even creating energy from trash (6%).
This diversified revenue stream adds to the companies stability, while also providing several internal growth opportunities.
What happens if people make more trash? WM makes money. What happens if people recycle more? WM makes even more money.
The company is has made significant efforts to advance technologies to reduce waste, increase recycling and reuse, create even safer treatment and disposal options, and develop sources of renewable energy.
Waste Management's waste-to-energy program is particularly impressive. While the program is currently a small portion of revenues, it remains a strong growth segment and had a 53% increase in sales in 2010 with a wide profit margin.
The company knows all too well the benefits of being green, and in 2007 announced its plans to pay $500 million a year for 10 years to increase the fuel efficiency of its fleet.
Besides its resiliency, Waste Management has another attribute that makes it a perfect defensive investment--- the company is a cash generating machine.
With a history of convert! ing this cash into shareholder value, Waste Management's dividend has steadily increased at a compound annual growth rate of 7.7% over the past seven years.
The payout nearly doubled in value from $0.75 paid per a share in 2004 to $1.36 paid per a share in the past 12 months---a yield of 4.4%.
Of course dividends aren't the only way to return money to investors, and the $501 million spent on share repurchases in 2010 is a pretty clear example of this.
With another $575 million in share buybacks planned for 2011, Waste Management's impressive history of share repurchases is set to continue.
Waste Management startled investors when it lowered its EPS guidance for 2011 to $2.14, having been $2.30 previously.
The lowered expectations reflected softer volume and more competitive pricing pressures, but investors reacted a bit more negative than necessary-making now the perfect time to buy the stock.
Margins may be squeezed temporarily by pricing pressure, but WM will remain resilient given the strength of its position.
This year I expect the company to generate $2.14 EPS from $13.3 billion in sales. Next year I estimate they will earn $2.44 EPS from just under $14 billion in revenue. At $31, shares trade at one times sales and 13 times EPS.
Although this is not a fast growth company anymore, shares deserve to trade at least 15 times EPS, or $37. Combined with the 4.4% dividend, that's 25% upside from here.
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