Did Bill Gates Buy Waste Management Stock?

Garbage disposal giant Waste Management (NYSE:WM) is a favorite stock for income investors and especially institutions.

With nearly 80% of the shares owned by institutional investors, WM’s status as a staple on Wall Street is hard to dispute.

The disposal company’s share price has risen by over 20% in the last 12 months, calling into question whether WM is still a buy at its new price point and whether Bill Gates is still an owner.

WM Strong Growth and a Solid Moat

Waste Management has impressed on the top line in recent years. In 2018, management reported revenues of $14.9 billion. Fast forward almost five years, and the company’s trailing 12-month revenues as of the end of Q3 totaled $20.1 billion.

The positive momentum has extended to earnings, which rose from $4.45 per share annually to $5.65 per share over the same period.

While the most recent quarter’s report contained no surprising revelations, it did highlight WM’s continued slow and steady growth trajectory.

Cash flow from operations increased by 6.9% year-over-year in Q3, while total collection and disposal volumes increased by 1%.

The company made modest progress in cutting costs, reducing operating expenses from 62.2% of revenue in the year-ago quarter to 61.3%. The company’s pricing increases also exceeded inflation, resulting in a boost to overall margins.

Waste Management is also continuing to invest in new initiatives that are expected to drive future growth. Investments in renewable energy and recycling, for instance, are two key drivers of a forward EBITDA increase of over $700 million that is projected to materialize by 2026.

These initiatives, paired with continued increases in service volumes, are likely to keep WM’s earnings rising at a sustainable pace well into the future. Over the coming 3-5 years, Waste Management’s earnings per share are forecast to rise at a rate of over 13% annually.

Speaking of profitability, WM also enjoys a respectable 11.5% net margin. Far more impressive is its return on equity, which stands at over 34%.

A final point to note about Waste Management is the favorable economic characteristics. As an essential service provider, WM is able to deliver solid revenues and earnings under practically all market conditions.

The company is also by far the largest in its market, giving it advantages of scale that would be difficult for other companies to compete with.

This is especially true considering that waste removal companies effectively become natural monopolies. WM actively manages landfills and other facilities while maintaining broad contracts for its waste removal services. Given the competitive advantage it has built up and the nature of its business, WM will likely be in a solid position to continue its positive performance for many years to come.

Decent Dividends With Room for More Growth

While it’s not an enormous yield, Waste Management does pay 1.5% annually in dividends. This low yield is somewhat offset by the fairly rapid rate of dividend growth in recent years.

Over the last decade, WM has raised its dividend at an average compounded rate of 6.7% annually. Given that the payout ratio is still under 50% and earnings are still expected to grow, there’s good reason to believe that the company will continue prioritizing distributions to investors.

WM has also used some of its cash reserves to repurchase shares, creating additional value for buy-and-hold investors. In December, the company announced a new buyback initiative for $1.5 billion of its own shares.

This came on top of a prior authorization for the same amount that started in late 2022. At the same time, management announced a dividend increase of 7.1%, which will begin showing up in the form of larger distributions in upcoming quarters.

Valuation Is High, But Not Excessive

For all of its appeal, WM trades at something of a premium. The stock’s forward price-to-earnings ratio of 27.7 is well above the S&P 500 average of 22.3.

Of slightly greater concern is its price-to-earnings-growth ratio of 32.4x, a level which could indicate that a stock is actually overvalued.

Despite these metrics, Waste Management’s performance and economic stability likely justify the premium. While investors aren’t getting a bargain in WM shares at the moment, the company appears to trade at a more or less fair price.

This is especially true in light of the company’s cash flow, which stands at $10.94 per share. This translates to a price-to-cash-flow ratio of 17.0x, which is fairly reasonable for a company with such strong financial qualities.

Low Business Risks, but a Little Too Much Debt

Because Waste Management effectively operates like a utility company, its business risks are quite modest.

The company provides an essential service that businesses, municipalities and individuals will continue to pay for irrespective of economic conditions. As noted above, WM also enjoys the advantages of being a market leader, minimizing its competitive risks.

Looking at Waste Management’s debt, however, the picture becomes a bit murkier. The company’s debt-to-equity ratio is currently 2.2x.

Long-term debt has also been steadily increasing over several years. Since 2020, the company’s debt has grown from around $10 billion to over $15 billion.

While WM seems to be investing this money effectively in the interest of its shareholders, this growing debt load could become a problem for the company in the future.

Is Waste Management a Good Buy at the Moment?

With current prices, Waste Management stock likely won’t generate rapid returns. Analysts project that the stock will be almost completely flat this year, resulting in an overall consensus rating of hold. However, the company’s potential for long-term earnings growth, competitive advantages, dividend growth potential and commitment to share buybacks all combine to make it a potential moderate buy, especially for income-oriented investors.

Although WM isn’t likely to skyrocket, the stock appears to be a safe asset that is likely to generate respectable income and dividend growth.

With further share buybacks, investors are also likely to see some upward pressure on share prices. Future pullbacks could also offer even better buying opportunities for investors who choose to build positions in the stock over time.