Thanks to a number of sizable acquisitions completed in the latter half of the 1990s, Waste Management’s (WM) revenues jumped 75 fold, to $13.1 billion in 1999. In the current decade, the company has not made any major additions, and has focused primarily on share repurchases . It has also increased the dividend from $0.01 a share in 2001 to an annualized rate of $1.24 in 2010. Between 2001 and 2008 Waste Management’s acquisition program was focused on relatively small waste collection operations in the vicinity of one of its landfills. In this regard, it has been less aggressive than two large competitors, Republic Services Group (RSG) and Waste Connections (WCN). On the other hand, Waste Management began to aggressively expand its waste-to-energy business last year.
Waste Management, through its Wheelabrator subsidiary, has been in the waste-to-energy business for many years. At the close of 2009, Wheelabrator operated 16 waste-to-energy facilities and five independent power plants, and it purchased another waste-to-energy operation for about $150 million in 2010’s second quarter. The company also converts naturally occurring methane gas in landfills into energy; it has about 120 landfill-gas-to-energy projects producing 540 megawatts of electricity per annum, the equivalent of powering 400,000 homes. In addition, as North America’s largest recycler, Waste Management managed more than seven million tons of recyclable commodities in 2009. Through internal growth and acquisitions, it expects to nearly triple that amount by 2020. Total revenue generated by Wheelabrator and the recycling business in 2009 was $1.6 billion (13% of the company’s total), and this percentage will likely increase meaningfully for the foreseeable future. Indeed . . .
Thus far in 2010, in addition to the aforementioned purchase of Wheelabrator’s 17th waste-to-energy facility, the company acquired, for $142 million, a 40% equity interest in a Chinese developer, which expects to build an average of two new plants a year in that country through 2020. Waste Management also plans to soon begin building its first waste-to-energy facility in Europe Its current target is the addition of six of these plants on the Continent and another four in the United States by the close of 2012. Another recent initiative was the launch of Dumpster In A Bag. This product, capable of holding up to 3,300 pounds of debris, is sold through retail chains, such as Home Depot (HD) and Lowe’s (LOW). Too, Waste Management operates one of the country’s largest fleets of heavy duty vehicles, and it added 800 natural gas-powered trucks in 2009. Moreover, through a joint venture, it recently built a plant that converts landfill gas into liquefied natural gas to fuel the trucks. And an innovation in the recycling operation entails the conversion of roof shingles into an asphalt product. Finally, the company has taken a stake in a Canadian firm whose proprietary thermo-chemical technology helps convert waste material into biofuels, such as ethanol, and it purchased a small medical-waste disposal operation from Stericycle (SRCL) in the first half of 2010.
In our view, Waste Management’s much-intensified environmentally related strategies should be viewed as a sound investment in bolstering its long-term revenue- and earnings-growth potential. Meanwhile, though, its estimated earnings advance for this year is quite modest and trails, by a wide margin, those of Republic Services and Waste Connections. The differential is mainly due to increasing profit contributions that the two competitors are reaping from the sizable acquisitions they made since 2008. On the other hand, Waste Management indicated that marketing expenses for its new Dumpster In A Bag program clipped share net by $0.01 in 2010’s second quarter. That said, Waste Management stock’s above-average dividend yield and attractive long-term total return potential should be of interest to conservative investors.