After Waste Management (NYSE: WM) reported its third-quarter results, its leadership team shared some important information with investors during the subsequent conference call. Here are the key takeaways for long-term shareholders.
1. Pricing power remains strong
Waste Management's irreplaceable landfills, transfer stations, and recycling centers combine to form a wide economic moat that insulates its business from the competition. In turn, the trash titan is able to consistently raise its fees. Together with its cost-control initiatives, these price increases are fueling margin expansion and earnings growth.
2. Hurricanes boost demand
While many businesses such as restaurants and retailers often see their operations damaged by the hurricanes and their aftermath, Waste Management tends to experience an uptick in demand for its services. More trash is deposited at its landfills during the cleanup process, as well as from the subsequent heightened construction activity as communities work to rebuild. In this way, Waste Management can serve as a defensive stock that could provide investors' portfolios an element of protection from the potential negative consequences of climate change.
3. More gas = more profits
Advances in hydraulic fracturing and horizontal drilling methods have led to a boom in U.S. natural gas production. This, in turn, has ushered in a period of low natural gas prices. Waste Management has wisely taken advantage of this situation by converting a steadily increasing portion of its truck fleet from traditional diesel engines to cleaner-burning -- and more cost-efficient -- CNG-powered vehicles. This is helping to lower costs and, by extension, increase profits.
4. Cash generation is at record levels
Waste Management is finding new ways to generate more cash flow from each dollar of sales; its third-quarter operating cash flow as a percentage of revenue was 23% -- a 160-basis-point improvement from the third quarter of 2016. Management expects operating cash flow to remain at this new rate of 22% to 23% of revenue, up from about 20% in prior years.
5. And management is committed to passing on this cash to shareholders
Waste Management's dividend policy includes a long-term target payout ratio of about 50%. Management is confident that the company can consistently produce at least $1.6 billion in annual free cash flow, so it could pay out as much as $800 million in dividends every year. That would represent a 2.3% yield at Waste Management's current market cap of $35.5 billion, making the trash titan a solid option for income-focused investors to consider.
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