Buy Waste Management. Not Now, Later

I like Waste Management [WMI]. It makes sense as a use for new money, but don't buy now. It's apt to go down like all securities. Good companies that continue to throw off good cashflow returns go down along with the poor earners. Study WMI, but be patient and buy it later. You will be rewarded.

Waste Management is a great company with a huge moat around its franchise. It is the nation's largest garbage company and now operates as almost a douopoly now that Republic Services has acquired Allied Waste . These two companies now control over 40% of the country's waste business. They have the ability to influence prices and I anticipate that they will, to the stockholders advantage.

WMI throws off significant amounts of cash and has been buying stock and increasing the dividend. The current dividend rate equates to a yield of 4.9% and a 49% payout ratio. Available cashflow is large and growing. Cashflow for 2008 was $2.5B with about $1.2B spent on capital expenditures. The company expects cashflow to grow in 2009 and intends to lessen capex to only $5ooM as they've upgraded vehicles and equipment aggressively in prior years. That will leave around $2B of discretionary money. Most of their debt is long term and not at onerous rates so I expect the dividend to be increased again as it was recently. At the present stock price, the company will also likely repurchase shares.

 Increasing cash generation, an increased dividend, and less shares are what investors usually like to hear. Especially if the company is in a relatively recession resistant industry and has a reasonable debt load. The 4.9% dividend yield should be safe.

WMI has been willing to lose business to maintain pricing and margins have improved. Waste hauling is a capital intensive business so it doesn't move to new operators easily when credit is tight. I expect WMI and RSG to both work on margins to offset the weakness in recycling pricing and construction rubble volume. The bulk of the business is residential and commercial trash hauling and that business is stable. Energy generation, both methane and trash-to-energy, are growing businesses. The company is expected to earn about $2.10 in 2009 and some estimates have been RAISED recently. A 12 P/E for a company that will perform well in a recession and better when we emerge is attractive. If they use their free cashflow to increase the dividend and buy back shares, their performance will look even better. Plus you get 5% as you wait for the market to respond and move the shares upward.

I already own shares and will buy more, but I'm content to wait as my hands look like a stigmata from catching falling knives, not religious virtue.