Why Waste Management Is a Core Stock for Your Portfolio
The best companies to own for the long haul are ones that share a few key characteristics:
- They provide a necessary product or service.
- They build difficult to surmount barriers to competition.
- They directly reward their shareholders for the risks of investing.
- They don't over-leverage their balance sheets with too much debt.
One of the few companies that fits all those criteria is trash kingpin Waste Management (NYS: WM) .
As implied by its name, Waste Management is in the garbage business. Indeed, with more than $13 billion in annual revenue, it's a behemoth in the often-maligned world of hauling away and disposing the remains of your everyday life and work.
Above and beyond the traditional service of landfill-based disposal, Waste Management also boasts a few logical extensions. For one thing, it claims to be North America's largest recycler, and for another, it generates enough electricity from its trash annually to power more than 1 million homes.
Why it's a core holding
To put it simply, the garbage business is an extremely critical one that isn't going away anytime soon. And even if we were to all fully embrace the "reduce, reuse, and recycle" mentality, who better to profit from that shift than the largest recycler on the continent?
On top of Waste Management being a large player in a critical industry, the trash business is one that creates literal mountains of barriers to entry -- landfills. Nobody wants a giant landfill in their backyard, and if a waste disposal company does manage to get clearance to build one, it generally becomes uneconomical or politically infeasible for a competitor to build another one anywhere close.
Given that a major expense in the business is hauling trash around, having a local dump gives the garbage company an incredible cost advantage over more distant competition. On top of that, many municipalities sign monopoly service contracts with a hauler, forcing out anyone else who even dare come close.
Waste Management also treats its shareholders well, with about a 4% current yield that has consistently risen each year for nearly a decade. And with a debt-to-equity ratio of around 1.5 to 1, it's not overleveraging itself just to attempt to temporarily juice investor returns.
Put the whole package together, and you get a company that meets all four of the above listed criteria for being a core stock worth owning.
Risks to watch
Of course, no company is immune to risks from the world around it, and that includes Waste Management. While it built its empire through gobbling up smaller players, that's a strategy that's fairly straightforward to copy for anyone with enough cash and willpower. Republic Services (NYS: RSG) , for instance, is another large player in the industry that has gained heft through consolidation.
The problem with consolidation is that once there are only a few dominant competitors in an industry, they tend to get aggressive with one another. That's especially a risk once most of the smaller players have been gobbled up and the only avenue for significant growth that remains is through trying to take share from the other titans in the industry.
Additionally, the garbage industry does face a lot of political risk linked to its environmental profile. While most of those costs can be passed on to its customers, as TransCanada (NYS: TRP) found out when President Obama stopped the Keystone XL pipeline, nothing puts growth at risk quite like an environmental halt.
Environmental concerns don't just stop expansion of capacity. These days, they can force shut downs, too, as electric utility Duke Energy (NYS: DUK) is discovering with several of its older coal-fired power plants. If environmental costs in the trash business get too high, Waste Management may also find itself in the situation where shuttering otherwise usable capacity becomes the least-ugly option.
Finally, as a unionized company, Waste Management often finds itself with less-than-ideal labor relations and strikers with demands for more. As General Motors (NYS: GM) found out as it was forced into bankruptcy at least in part by union-demanded legacy costs keeping its expenses high, poor labor relations can cripple a company's flexibility at exactly the time it most needs to be nimble to survive.
The bottom line
Still, despite the potential risks it faces, Waste Management is well positioned to continue to lead in an absolutely essential line of business that will be in demand for the foreseeable future. And given its market position and the propensity of waste haulers to wind up as local monopolies, it should be able to maintain sufficient pricing power to cover rising labor and environmental costs.
Combine that industry leading position and ability to cover its costs with its shareholder-friendly dividend policy and its comfortable balance sheet leverage ratio, and the result is a company worth considering as a core stock.
Indeed, I'm so confident in the company's long-term future that I've given it a 5-Year Outperform CAPScall. I've put my own CAPS All-Star rating on the line by handing out a green thumb to its shares in Motley Fool CAPS.
At the time this article was published At the time of publication, Fool contributorChuck Salettadid not directly own shares of any company mentioned in this article, but his wife owned shares of Waste Management and Duke Energy.Click hereto see Chuck's holdings and a short bio.The Motley Fool owns shares of Waste Management.Motley Fool newsletter serviceshave recommended buying shares of General Motors, Waste Management, TransCanada, and Republic Services.Motley Fool newsletter serviceshave recommended creating a write covered strangle position in Waste Management. Try any of our Foolish newsletter servicesfree for 30 days.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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