Is Waste Management Stock a Buy?

waste management (NYSE:WM) takes care of the unspectacular job of collecting the garbage. It’s one of those things that has to be done no matter what’s going on in the world or on Wall Street. But that fact alone isn’t enough to make a stock a buy.

Here are four things to consider before jumping on board with Waste Management.

1. Waste management is a very reliable business

The coronavirus pandemic has made 2020 a very difficult year for many companies, but Waste Management’s business has held up exceptionally well. Its sales fell by almost 1.5%, with adjusted operations EBITDA reduced by 1.4%. Given the health headwinds, that’s a pretty solid performance. It’s worth noting, however, that both revenue and Adjusted EBITDA grew slightly year over year in the fourth quarter, up 5.4% and 1.8%, respectively. So the results improved throughout 2020.

Image source: Getty Images.

To be fair, fourth-quarter and full-year earnings were lower, but Waste Management’s business held up strongly. That’s what you’d expect, given that it collects junk – something that needs to be done regardless of the problems the world is facing.

Meanwhile, in terms of year-over-year earnings declines, it is worth noting that the company offered some customers price concessions in the early stages of the pandemic, intentionally trimming its bottom line to support valued partners. It’s just good business, even if it had a negative impact in the short term. All in all, given the situation, 2020 was a decent year and proves the resilience of Waste Management’s business.

2. Waste management has irreplaceable assets

One important thing that shouldn’t be overlooked about Waste Management is the scope of its business. It’s a massive $15 billion company that serves about 20 million customers. This is underpinned by a huge fleet of trucks and facilities, including 244 solid waste sites and five hazardous waste sites.

Almost anyone can buy a garbage truck or industrial object, but a landfill is a different story. Landfills are highly regulated facilities and very few people want to build a new landfill in their backyard. Landfill ownership gives Waste Management a place to dispose of the garbage it collects and allows it to also charge competitors who dump their collections at these facilities. It’s a lasting competitive advantage.

3. Waste management returns value to shareholders

Waste Management has increased its dividend annually for 17 straight years, including an increase in 2020. That shows a significant commitment to shareholders and should interest those with a Focus on dividend investing.

Over the past decade, the average annual increase in its dividend has been a decent 5.5% or so. That’s more than enough to offset the historical effect of inflation and thus increase the purchasing power of the dividend over time. Basically, Waste Management is a slow and steady performer with a robust and differentiated business. So far, so good.

4. Waste Management has a small problem

However, the question here is not whether or not waste management is a good business. That’s important (and it is), but the decision to buy a stock must also include a look at valuation. Paying too much for a good company can turn it into a bad investment. Here’s the problem.

WM diagram

WM data through YCharts

Starting with dividends that can be used as a simple assessment toolWaste Management’s yield today is a meager 1.9%. That’s more than the roughly 1.5% that investors would get from one S&P500 index funds, but not a particularly large number on an absolute level. Those looking to maximize current income are unlikely to be drawn to waste management. What is more notable, however, is that the shares dividend yield is approaching its lowest level in the last ten years. This indicates that the stock is currently highly valued.

Supporting this view is the fact that Waste Management’s price-to-sales, price-to-earnings, price-to-cash-flow, and price-to-book ratios are all above its five-year average. In fact, some of these metrics are well above their longer-term averages, meaning value-conscious types are likely to shy away from waste disposal. And as mentioned above, this is a slow and steady turtle of a company, not a fast-growing tech stock, meaning growth investors will likely want to avoid it, too.

The wrong time to buy

There are many things to like about Waste Management’s business, but that alone isn’t enough to make the stock worth buying. If you take a step back and examine the valuation here, it looks like most investors would be better off on the sidelines right now. Still, it wouldn’t be a bad decision to keep Waste Management on the wish list, given the business’s resilience during tough times, just in case there’s a meaningful sell-off in the market.

This article represents the opinion of the author, who may disagree with the “official” endorsement position of a Motley Fool premium advisory service. We are colourful! Challenging an investment thesis — including one of our own — helps us all think critically about investing and make decisions that help us be smarter, happier, and wealthier.

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