This article is sixth in the series of articles about share buybacks and whether the company doing them is returning value to share holders. The previous articles can be found here:
Companies With Buybacks: ISRG Edition
Companies with Buybacks: AMAT Edition
Companies with Buybacks: LOGI Edition
Companies with Buybacks: SBUX Edition
Companies with Buybacks: GPS Edition
The company
Houston, Texas-based Waste Management (WM, Financial) was founded in 1987. It enjoys a nationwide presence in dealing with all things garbage. Besides hauling it, the company is increasingly working on ways to reuse, recycle — and make money in the process. It owns and/or operates 271 landfill sites and 294 transfer stations, providing collection, transfer, recycling, and disposal services for your garbage. Also through its subsidiary Wheelabrator Technologies, Waste Management runs 22 plants that produce renewable energy from waste. And with landfill volumes declining in recent years as more customers compost and recycle their discards, the company's also become a major recycler. Its sales in recycling area have increased $423 million in 2010.
Management compensation
Shareholder return
Waste management has a streak of dividend increase since 1998. It has also bought back shares every year since 2001. The share count has gone from 629 million to 482 million — a 23% decrease in shares outstanding.
Waste Management shares returned 59% over the past decade. This is a measly 4.7% compounded return. Earnings growth was fairly strong during this time. But the market has paid less and less for its earnings. In 2001, the P/E was around 25 and now it is 15. This is a 40% drop in the multiple and a lot of good performance has been gobbled up by the drop.
Balance sheet
Does WM has the necessary funds for stock buybacks ? From the third quarter report 2011 we dig up the following figures.
The interest coverage ratio, which is EBIT/interest expense, denotes if a company is having trouble meeting its interests payments on the debt. For WM the ratio stands at 4 which means that WM is having no trouble paying its interests. For this to work, we also need to look at if the company is a consistent generator of cash. Let us look at the FCF figures for WM in the last decade.
As we see, WM is a cash generating machine. The FCF has been pretty good and there has been no down year so far in the last decade.
Valuation
As we saw earlier, WM looks cheap at the moment. As the FCF of WM has been very consistent, we can use the DCF model for valuation. At 15% discount rate the market is expecting a measly 1.5% growth rate (current price $30.25 per share and market cap of $13.9 billion). The analysts forecast the growth to be around 6.3% for the next five years.
Conclusion
Let's look at some of the reasons not to invest in WM.
The share buyback is a definite buy. The management is very shareholder friendly and the share buyback is definitely returning value to shareholders.
I am long on WM. Will start accumulating if prices go down to $27.
Companies With Buybacks: ISRG Edition
Companies with Buybacks: AMAT Edition
Companies with Buybacks: LOGI Edition
Companies with Buybacks: SBUX Edition
Companies with Buybacks: GPS Edition
The company
Houston, Texas-based Waste Management (WM, Financial) was founded in 1987. It enjoys a nationwide presence in dealing with all things garbage. Besides hauling it, the company is increasingly working on ways to reuse, recycle — and make money in the process. It owns and/or operates 271 landfill sites and 294 transfer stations, providing collection, transfer, recycling, and disposal services for your garbage. Also through its subsidiary Wheelabrator Technologies, Waste Management runs 22 plants that produce renewable energy from waste. And with landfill volumes declining in recent years as more customers compost and recycle their discards, the company's also become a major recycler. Its sales in recycling area have increased $423 million in 2010.
Management compensation
- All non-employee directors receive an annual cash retainer for board service and additional cash retainers for serving as a committee chair. Directors do not receive meeting fees in addition to the retainers. In 2010, directors (except the chairman of the board) received around $100,000 in cash and around $120,000 in stocks. The chairman received around $220,000 in each. They received no stock options. Three of the directors own security options with 10,000 underlying shares at strike price of $30.24 that was granted in 2002.
- The whole management (a group of 25 members) owns around 1.4 million shares, which is much less than 1% of the shares outstanding. There has been no significant buying in 2011.
- The executive committee (a group of 6 members) received $20 million in salary, out of which $4.9 million were in restricted stock units and $4 million were in stock options at $33.62 strike price.
- The burn rate (share dilution due to compensation) is less than 0.06%.
Shareholder return
Waste management has a streak of dividend increase since 1998. It has also bought back shares every year since 2001. The share count has gone from 629 million to 482 million — a 23% decrease in shares outstanding.
| 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |
| Shares Outstanding | 628.75M | 618.05M | 594.34M | 583.23M | 565.55M | 547.14M | 521.52M | 495.40M | 493.60M | 482.20M |
| Stock Bought Back | - | 1.73% | 3.99% | 1.90% | 3.13% | 3.36% | 4.91% | 5.27% | 0.36% | 2.36% |
| 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |
| Dividend Paid | 6.00M | 6.00M | 6.00M | 432.00M | 449.00M | 476.00M | 495.00M | 531.00M | 619.00M | 649.00M |
| Shares Outstanding | 628.75M | 618.05M | 594.34M | 583.23M | 565.55M | 547.14M | 521.52M | 495.40M | 493.60M | 482.20M |
| Dividend Paid Per Share | 0.01 | 0.01 | 0.01 | 0.74 | 0.79 | 0.87 | 0.95 | 1.07 | 1.25 | 1.35 |
| Price at Year End | 31.91 | 22.92 | 29.60 | 29.94 | 30.35 | 36.77 | 32.67 | 33.14 | 33.81 | 36.87 |
| Dividend Yield | 0.03% | 0.04% | 0.03% | 2.47% | 2.62% | 2.37% | 2.91% | 3.23% | 3.71% | 3.65% |
Waste Management shares returned 59% over the past decade. This is a measly 4.7% compounded return. Earnings growth was fairly strong during this time. But the market has paid less and less for its earnings. In 2001, the P/E was around 25 and now it is 15. This is a 40% drop in the multiple and a lot of good performance has been gobbled up by the drop.
Balance sheet
Does WM has the necessary funds for stock buybacks ? From the third quarter report 2011 we dig up the following figures.
| Items (in $millions) | 09.2011 | 12.2010 |
| Cash | 282 | 539 |
| Total current assets | 2,419 | 2,482 |
| Goodwill | 6,104 | 5,726 |
| Total assets | 22,052 | 21,476 |
| Current liabilities | 2,527 | 2,485 |
| LT debt | 9,388 | 8,674 |
| Total liabilities | 15,767 | 14,885 |
| Total equity | 6,285 | 6,591 |
| Nine months ended Sep 30, 2011 | Nine months ended Sep 30, 2010 | |
| Interest expense | 358 | 354 |
The interest coverage ratio, which is EBIT/interest expense, denotes if a company is having trouble meeting its interests payments on the debt. For WM the ratio stands at 4 which means that WM is having no trouble paying its interests. For this to work, we also need to look at if the company is a consistent generator of cash. Let us look at the FCF figures for WM in the last decade.
| 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |
| Free Cash Flow | 1.03B | 866.00M | 726.00M | 960.00M | 1.21B | 1.21B | 1.23B | 1.35B | 1.18B | 1.17B |
As we see, WM is a cash generating machine. The FCF has been pretty good and there has been no down year so far in the last decade.
Valuation
As we saw earlier, WM looks cheap at the moment. As the FCF of WM has been very consistent, we can use the DCF model for valuation. At 15% discount rate the market is expecting a measly 1.5% growth rate (current price $30.25 per share and market cap of $13.9 billion). The analysts forecast the growth to be around 6.3% for the next five years.
Conclusion
Let's look at some of the reasons not to invest in WM.
- High debt load. Debt/equity ratio of 1.4.
- Capital intensive industry.
- 10-year average revenue growth rate of 0.02% (!). The industry is not going to see rapid growth in any way.
- EPS has stayed around $2 per share since 2005, even with share buybacks.
The share buyback is a definite buy. The management is very shareholder friendly and the share buyback is definitely returning value to shareholders.
I am long on WM. Will start accumulating if prices go down to $27.
