Waste Management Is A Core Holding

Mount Dora is a town with a canopy of live oaks covered with spanish moss. Consequently, acorns are always falling. Occasionally they hurt as they drop on the unsuspecting walker's head. Mostly they are just a nuisance as neighbors are always sweeping walks and street cleaners are tidying up the avenues.

On my walk today I commented to an ernest sweeper " it's a endless job isn't it?". Her response was apt : "I wish they had value and we could sell them." Alas, acorns don't have any value, they're just waste. Other than acorns and spanish moss, most waste does have a value and that brings me to a long time holding, Waste Management.

I've owned this company longer than any other and have grown accustomed to it and its yield, about 3.6% at todays share price. The market values it fairly, not cheaply, at about about 9 X cashfow, 15 X forward earnings, and 2.75 book value. WM uses debt, but isn't overly leveraged.

It, like its major competitor, Republic Services, run little monopolies in the communities they serve. Even if the monopoly comes unraveled by losing a franchise renewal on the pickup of refuse, they still control the landfill and are in an excellent negotiating position. Besides the standard garbage pickup and recycling, they have a large and growing portfolio of gas from waste and electricity from waste projects. They are the ultimate green company. They make money off of everything, including the acorns that adorn the streets of Mount Dora.

I bought WM years ago as a turnaround and both it and its share price have done nicely. I don't think there is any large underpricing here and the share price will mirror the market moves. But that's OK as I also get the 3.6% dividend yield. The payout ratio is about 60%, higher than I'd like, but the rather consistent revenue stream gives me comfort.

Waste Management is a fine company available at a reasonable price that throws off an excellent dividend. A core holding that pays much more than a CD or savings account.

Enjoy Summer Because The Fall Is Coming

And I do mean the fall. Falling stock prices this Fall. The market, no matter how good it feels, is way ahead of reality. I know Warren Buffett says that markets rebound before economies do, but this economy has a long way to recover before it is healed. We have made only a small dent in deleveraging the years of debt exuberance.

This Summer I've lopped a couple of strokes off my golf handicap, worked down the honey-do list, grilled and floated in the pool with the dog. My remaining stock portfolio has done wonderful and I don't regret any opportunity cost associated with my outsized cash position. Grilling, beer, and a growing portfolio-perfecto!

It took a while but I finally got out of a stupid investment, Southwest Airlines. When I bought it I opined that it was a lousy industry and even Buffett had trouble making money in it. But I thought LUV was the best and the price was attractive. Well I've been in a deep loss for months and the market euphoria has finally pushed it up enough that I've exited with a decent gain. But, the industry stinks and I've learned a lesson. Never buy a great company in a bad industry.

Flowers reports soon and I think all the insider buying bodes well for the results and hopefully it isn't already baked into the price. Aarons and K12 have rebounded nicely and should continue to move upward as their sell-offs were overdone. My remaining stocks like the above names and Waste Management are all defensive and should do relatively well when the market moves South as I expect it to this Fall.

Why do I expect it to decline? Here's why:

Commodity prices don't signal growth, they signal speculation

China's growth will be modest and their commodity binge is troubling

The chicken and the egg question and I think the American consumer will not be enticed by cheap Chinese goods. Saving yes, buying no.

Financials are not healed and will need another round of capital raising, if they can get it.

Obama is finally starting to scare both business and consumers

I could be wrong, but as Charles Barkley says: "I don't think so". It remains better to protect capital than to miss gains.

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.