Company Description: Waste Management Inc. is the largest U.S. trash hauling/disposal concern.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
WM is trading at a premium to all four valuations above. Since WM's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 152.6% premium to its calculated fair value of $19.58. WM did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
WM earned one Star in this section for 1.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The company has paid a cash dividend to shareholders every year since 1998 and has increased its dividend payments for 11 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
The NPV MMA Diff. of the $245 is below the $2,400 target I look for in a stock that has increased dividends as long as WM has. The stock's current yield of 3.03% exceeds the 2.98% estimated 20-year average MMA rate.
Memberships and Peers: WM is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. The company's peer group includes: Casella Waste Systems Inc. (CWST) with a 0.0% yield, Republic Services, Inc. (RSG) with a 2.9% yield, and Waste Connections Inc. (WCN) with a 1.0% yield.
Conclusion: WM did not earn any Stars in the Fair Value section, earned one Star in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of one Star. This quantitatively ranks WM as a 1-Star Very Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $22.19 before WM's NPV MMA Differential increased to the $2,400 minimum that I look for in a stock with 11 years of consecutive dividend increases. At that price the stock would yield 6.8%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,500 NPV MMA Differential, the calculated rate is 10.5%. This dividend growth rate is higher than the 2.7% used in this analysis, thus providing no margin of safety. WM has a risk rating of 2.25 which classifies it as a Medium risk stock.
WM enjoys substantial scale compared to its competitors. Its core business generates annuity-like cash flows by providing services to residential, commercial, and industrial customers. The company will likely continue to make niche acquisitions while pursuing debt reductions, share buybacks and increasing dividends.
In July 2014, WM agreed to sell its Wheelabrator Technologies subsidiary to Energy Capital Partners for $1.94 billion, subject to customary regulatory approvals. The transaction is expected to close before the end of 2014.
On October 29, 2014, the company reported net income of $270 million or $0.58 per share for the third quarter versus $291 million or $0.62 per share in the prior year quarter. The results included $66 million after-tax charges related to restructuring and legal reserves. Projected free cash flow is expected to exceed $1.5 billion in 2014.
At 65%, WM's Debt To Total Capital is in excess of my 45% maximum, Free Cash Flow Payout at 59% is below my maximum. The stock is currently trading significantly above my calculated fair value price of $19.58. For now, WM is not a stock that I am considering for any of my income portfolios.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was held no position in WM (0.0% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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Tags: WM, CWST, RSG, WCN,
