Waste management (NYSE:WM) bows this week. Unfazed by the uncertain economy, the resilient waste, recycling and natural gas sector announced a 7.1% increase in its quarterly dividend and authorized a $1.5 billion share buyback.
“Our company’s strong and consistent cash flow generation allows WM to continue to fund all of our capital allocation priorities,” Waste Management CEO Jim Fish said in a news release Monday.
Here’s a closer look at WM’s capital return program and why the company is confident enough to return even more capital to shareholders – both directly and indirectly.
Return money to shareholders
WM’s increased dividend amounts to $0.75 per quarter, up from $0.70. This translates to $3 per year, giving the stock a dividend yield of 1.6%. It is striking that this dividend yield is currently higher than the S&P500dividend yield of approximately 1.5%.
Long-term shareholders of WM have been rewarded with a longer period of dividend growth. The company’s latest increase marks its 21st consecutive year of dividend increases. More importantly, dividend growth will continue in the coming years. WM’s payout ratio, or the trailing twelve months’ dividend payments as a percentage of earnings, is less than 50%. This means there is plenty of room for further increases even if the company’s earnings growth stagnates.
Furthermore, such a low payout ratio, combined with WM’s stable and reliable cash flow, gives WM enough flexibility to return cash to shareholders in more than one way. WM also said Monday it is renewing its share repurchase authorization, announcing a new $1.5 billion authorization to replace its previous $1.5 billion program. If the waste management specialist maintains its current pace of buybacks, it will likely buy back more than $1 billion worth of shares (management says it will have repurchased a total of $1.3 billion by 2023). Such a substantial buyback program will make a nice dent in the share count over time, as WM’s current market cap is just over $71 billion.
A resilient growth story
Fortunately, there are good reasons to expect robust earnings and free cash flow growth from WM in the coming years. To signal its growth ambitions to investors, the company changed its branding from the official name Waste Management to simply WM in 2022, as it increasingly strives to be much more than a waste company. WM has made substantial investments in the production of renewable natural gas (RNG) – made using processed biogas collected from its extensive landfill network – which is used by its fleet of garbage trucks and in some cases converted into electricity.
“Our seventh renewable natural gas power plant and the third of 20 facilities in our growth program are expected to be in operation in January,” Fish said in the company’s third-quarter earnings call in late October. “And we have four more facilities on track for completion in 2024, including two of the largest projects in the portfolio, Fairless in Pennsylvania and Orchard Hills in Illinois.”
Naturally, this nascent RNG operation is supported by the company’s core waste operations, which are arguably among the most resilient and reliable business models in the world.
According to the current analyst consensus forecast, WM’s earnings per share will grow by an average of 10% per year over the next five years. And given the company’s history of delivering steady revenue growth from its collection business and its nascent RNG business, this forecast seems feasible.
All told, WM’s resilient business, latest dividend increase and expected robust earnings per share growth over the next five years make the stock look attractive at its current valuation of 31 times earnings.
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Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool recommends waste management. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.