3 things about waste management stocks that savvy investors know

Waste Management (NYSE:WM) is known to be a stable mainstay, allowing the business to see stable returns despite the tumultuous economic climate. The company’s shares are down only 3% year-to-date, which is a better performance than even the Dow Jones Industrial Average — an index known to be less volatile than other major indices.

Waste Management is often seen as a boring business, but some investors may overlook a few facts showing that Waste Management may not be as “boring” a stock as many might think. While the Waste Management business isn’t building the latest innovative technology, its strength in the space and shareholder-friendly actions are quite exciting. Additionally, there may be more expansion in store for the industry, which Waste Management looks poised to capitalize on as a leader. Here’s why you might want to take a closer look at this safe stock.

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1. Waste Management has the (pricing) power!

This company could be considered a company with underappreciated pricing power – the ability to consistently raise prices without seeing customers leave. Waste Management has steadily increased its base price, which includes fees, surcharges and additional price increases for customers, from approximately 3.5% in 2015 to 4% in 2019. The company’s base price fell in 2020 but came back even stronger in 2021 and 2022. Waste Management’s base price in the second quarter of 2022 was 7.5%, a record for the company.

How does Waste Management have such pricing power? First, garbage collection and disposal is an indispensable service for businesses and consumers in all economic conditions. With Waste Management in the lead with nearly 25% market share, it would be difficult to switch suppliers, so many customers remain with Waste Management.

The second reason is the cost to customers versus other expenses. As COO John Morris explained on the second quarter conference call, Waste Management fees are a tiny part of a company’s overall cost structure. Waste management costs are typically only 0.5% of total company expenses. Therefore, customers are either ready to accept these small price increases or hardly notice them.

This helps the company raise prices without seeing significant churn. Although management did not say so explicitly, given the price stickiness, there is reason to believe that the company could continue to steadily increase its base price, which would translate into higher profitability. long-term.

2. Dividends are likely to rise

Another reason to be optimistic about Waste Management over the long term is its expected dividend appreciation. The company has increased its dividend for 19 consecutive years, putting it on track to become a Dividend Aristocrat (a company that has increased its dividend for at least 25 consecutive years).

Another thing to note is the company’s relatively low payout ratio. Waste Management only used about 38% of its net profit to pay its dividend in 2021, which is a very healthy number. As the company finds fewer ways to spend its net income, it could generate a larger dividend. In short, there is reason to believe that the company’s payout to shareholders will steadily improve over the long term.

3. There is more growth than you think

While it’s not like the tech market, the waste management space might be growing faster than you think. According to Markets and Markets, the total waste management industry is expected to grow at a compound annual rate of more than 5% from 2021 to 2026 to reach $543 billion. Considering Waste Management is top dog but has only generated $19 billion in revenue over the past 12 months, the company seems poised to benefit from this expansion.

Why is Waste Management positioned best? The company’s competitive advantage comes not only from its dominance, but also from the industry’s high barriers to entry. For example, building a landfill can cost up to $800,000 per acre, and Waste Management had 260 active landfills as of July 2022. Therefore, for other rivals to get the same amount of capital as Waste Management ( especially the smaller competitors), it would take plenty of time and money.

With rising dividends, a bigger-than-expected opportunity, and enduring pricing power that will likely continue to bolster the company’s bottom line, Waste Management has the potential to post lucrative long-term returns. That seems like reason enough to get excited about this “boring” stock. If you don’t already own any Waste Management stocks, you might want to put them on your watchlist.

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Jamie Louko holds positions in waste management. 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.

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