There’s money to be made by hauling away the stuff nobody wants around anymore.
Despite how simple it seems on the surface, waste hauling can be a fairly lucrative business for two key reasons.
First, virtually everyone creates a demand for waste services. Even places that are committed to “zero waste to the landfill ” will very likely need to contract with a waste hauler to get the recyclable waste away from their facilities and processed.
Second, landfills are very much a NIMBY -- Not In My Back Yard -- resource. While most people appreciate the fact that landfills mean that trash doesn’t pile up in their homes, they don’t really want those landfills anywhere near them. That gives existing trash companies with landfills close to urban areas strong moats against new competition.
With that in mind, Waste Management (NYSE: WM) and Republic Services (NYSE: RSG) are the two largest trash-hauling companies in the United States. Read on to see whether one of them may look like a better investment than the other.
Republic Services Inc
Valuation comparison
Waste Management currently trades at around 27.6 times its forward earnings, and they are expected to be able to increase their income by around 8.5% annualized over the next five years. Republic Services currently trades at around 27.8 times its forward earnings, and they're expected to be able to increase their income by around 8.9% annualised over the next five years.
Because of how close those metrics are for both businesses, it certainly looks like neither one of them has a significant advantage over the other. The reality is that nobody’s projections of the future are perfect, but the fact that these two titans of trash appear similarly valued is a decent sign that the market is comparably confident in both of them.
Balance sheet comparison
Republic Services has a 1.2 debt-to-equity ratio, $132 million in cash, $12.3 billion in debt, and a current ratio of 0.74. Waste Management sports a 2.3 debt-to-equity ratio, $257 million in cash, $15.4 billion in debt, and a current ratio of 0.87. As a general rule, the lower the total debt level and debt-to-equity ratio (as long as it’s at or above zero), the better for a company in the long run. On the flip side, the higher the current ratio and cash level, the better for a company in the short term.
With that tradeoff in mind, Republic Services gets a slight edge from a balance sheet perspective, thanks to its lower total debt and better debt-to-equity ratio. Of course, in an industry like waste hauling where demand remains fairly strong even in rough economic times, a company’s balance sheet strength is less likely to be tested than one in a more cyclically exposed line of business.
Dividend comparison
Republic Services sports around a 1.4% yield and a 41% dividend payout ratio, and within the past year, it increased its dividend by about 7.6%. Waste Management offers investors around a 1.7% yield while having a 48% dividend payout ratio, and within the past year, it increased its dividend by about 7.7%.
Since both companies have payout ratios in the 40s and anticipated growth rates slightly higher than their last dividend hikes, they both offer decent reasons to believe that dividend growth can continue. That said, this time, the edge goes slightly to Waste Management, due to its higher yield while still offering investors a supported dividend with the potential for growth.
All in all, it’s a fairly balanced competition
From a valuation front, Waste Management and Republic Services appear to be in lockstep with one another. Republic Services pulls a bit ahead from a balance sheet perspective, while Waste Management catches back up with its dividend.
As a result, for investors looking to find treasure in trash, it’s largely a matter of preference. More conservative investors may prefer Republic Services for its better balance sheet, while more aggressive ones may like Waste Management’s slightly higher income.
At the time of publication, Chuck Saletta’s wife owned shares of Waste Management.
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Sources – EasyResearch, Britannica, UL solutions, Zippia, Yahoo Finance.
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