Waste management stock Waste Connections Inc. is a buy for long-term share price gains and small, but growing dividends.
Many of us are producing more garbage and paying more to have it hauled away. Waste Connections (TSX—WCN; NYSE—WCN) is benefiting from this trend, but not all aspects of its business are rosy.
Waste Connections’ solid waste business is performing well. In the second quarter, prices rose five per cent while volumes increased two per cent. This drove the company’s underlying solid waste collection, transfer and disposal profit margin up about 70 basis points.
Unfortunately, contributions from the company’s commodity-related activities, primarily recycling and renewable fuels, were lower than expected. Ongoing erosion in recycled commodity prices and a precipitous drop in renewable fuel credits negatively impacted overall results. Also acquisitions completed since last year diluted margins.
Diversification reduces risk
Waste Connections is an integrated solid waste services company that provides non-hazardous waste collection, transfer, disposal and recycling services in mostly exclusive and secondary markets in the US and Canada. Through its R360 Environmental Solutions subsidiary, the company is also a leading provider of non-hazardous oilfield waste treatment, recovery and disposal services in several of the most active natural resource producing areas in the US, including the Permian, Bakken and Eagle Ford basins.
Lower than expected contributions from commodity-related activities and the negative margin impact from acquisitions have not been enough to offset strength in the solid waste collection, transfer and disposal business. Consequently, the company’s overall financial performance has been decent so far this year.
For the six months ended June 30, 2019, Waste Connections made an adjusted $345.2 million (all figures in US dollars unless otherwise noted), or $1.31 a share, compared with $320.9 million, or $1.21 a share, in the same period of 2018.
Revenues rose 9.8 per cent to $2.6 billion from $2.4 billion. Acquisitions added about $159.5 million to revenues, while divestitures subtracted $13.1 million from revenue.
Dividends are low but growing
The company doesn’t direct a lot of its profit to dividend payments. Its dividend-payout ratio is expected to be 26 per cent for 2019. But ever since the company established a dividend in 2010, dividend growth has been rapid. Over the past five years, the dividend has more than doubled. We expect a further increase of about 10 per cent this month.
Waste Connections has a lot of appeal as a long-term holding. Whether the economy is doing well or not, we all need to dispose of our trash. And this serves as a recipe for consistently rising profits over time. Even the 2008 to 2009 financial crisis didn’t throw the company much off track. Though growth slowed, earnings per share continued to rise over the recession years. Back then, the company continued to churn out free cash flow as it does today.
Waste Connections’ shares trade at 35.2 times this year’s forecast earnings of C$3.52 a share. This high multiple, which is in line with the average for the past five years, reflects strong and consistently rising earnings, as well as a very stable stock that has strong price-growth persistence. This makes it in high demand among investors, but the share price could fall significantly if the company were to ever slip up in a major way. Therefore, it’s best suited as a long-term holding. It currently yields 0.7 per cent.
Waste Connections is a buy for long-term growth and a low but growing dividend.
This is an edited version of an article that was originally published for subscribers in the October 2019/Second Report of The MoneyLetter . You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter. 
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