Higher Volumes, Prices Fuel Waste Management, Inc. Earnings

By Joe Tenebruso Markets Fool.com

Waste Management(NYSE: WM) saw its fourth-quarter results boosted by a profitable combination of growing collection volumes, price increases, and cost controls.

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Revenue grew 6.6% to $3.46 billion, including growth of 2% from higher collection volume, 3.2% from average yield, and 1.5% from acquisitions, offset slightly by divestitures (-0.1%).

Additionally, Waste Management continues to demonstrate strong pricing power, with core price -- which consists of price increases net of rollbacks and fees -- coming in at 5.1% in the fourth quarter, up from 4.3% in Q4 2015.

Waste Management also benefited from higher recycling commodity prices, which jumped 31.6% year over year.

Image source: Waste Management.

Moreover, the company furthered its cost control initiatives in the quarter, with operating expenses as a percentage of revenue improving to 62.1%, down from 62.4% in the prior-year period. That helped operating income -- adjusted for restructuring and other non-recurring items -- grow 7% to $617, while adjusted operating EBITDA (earnings before interest, taxes, depreciation, and amortization) rose 6% to $930 million.

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All told, adjusted net income increased 5% to $335 million. And earnings per share, boosted by share buybacks, grew 6% to $0.75.

Most importantly, Waste Management continues to strengthen its cash flow generation, with free cash flow for the full year jumping 18% to$1.66 billion. In turn, the garbage titan returned $1.45 billion to investors in dividends and share repurchases in 2016.

"2016 was a very successful year for Waste Management, as we exceeded the goals that we established for the year, delivering financial results above our original full-year guidance for adjusted earnings per share, free cash flow, and operating EBITDA," said CEO Jim Fish in a press release.

Looking forward

Waste Management issued a financial outlook for 2017, including:

  • Core price of 4% or greater, with internal revenue growth from yield on the collection and disposal business of approximately 2%.
  • Internal revenue growth from volume between 1.2% and 1.6%.
  • Operating EBITDA of$3.95 billion to $4 billion.
  • Adjusted EPS of$3.14 to $3.18.
  • Free cash flow of between$1.5 billion and $1.6 billion.

"We will maintain our focus on driving core price, growing high-margin volumes, and controlling costs, positioning us for strong earnings and cash generation in 2017," said Fish.

Waste Management intends to pass on the majority of that cash to shareholders, as the company anticipates repurchasing $750 millionof its stock and increasing its dividend 3.7% to$1.70per share in 2017. Additionally, Waste Management expects to spend between$100 million and $200 millionfor tuck-in acquisitions in the year ahead.

Essentially, investors can expect more of the same from Waste Management: strong cash generation that allows the company to reward investors with value-creating share buybacks and a steadily rising cash dividend stream.

Data source: YCharts.

As such, Waste Management remains an excellent low-risk stock for income-seeking investors to consider.

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Joe Tenebruso has no position in any stocks mentioned. The Motley Fool owns shares of Waste Management. The Motley Fool has a disclosure policy.