Trash-Collection Dominance Means Steady Profits

Longtime Stansberry Research readers know we love highlighting thriving yet "boring" businesses...

These businesses may not generate headlines like high-growth stocks, but that doesn't mean they're bad investments. In fact, the steady sales and profits that come rolling in for solid boring businesses usually lead to solid gains in the market.

Today's company is a great example...

Waste Management (NYSE: WM) has quietly built one of the greatest businesses of all time. This World Dominator has the largest waste-disposal network in North America, unmatched by any competitor.

Garbage collection isn't an exciting business. But it's an incredibly important service. And it performs well in a recession. No matter what's going on in the economy, folks need their trash picked up.

Waste Management's network includes 293 landfills, five secure hazardous-waste landfills, and nearly 45,000 employees. It brought in more than $15 billion in revenue in the last 12 months.

Waste Management built this network with a growth-through-acquisition strategy.

By 1995, it had acquired more than 400 waste-hauling companies. It merged with USA Waste Services, one of its larger competitors, in July 1998. And in 1999 – the frothiest year of the biggest equity bubble in history – the newly merged company acquired roughly one new waste hauler per day. Its total number of acquisitions eventually exceeded 1,500.

Waste Management still follows its classic growth-by-acquisition strategy, though far less aggressively than in 1999. This network makes Waste Management the largest player in the space. And competition is hard to come by...

Waste Management owns more landfills than any competing company... And they're expensive to build.

The book value (which is really historical cost) of all Waste Management's land and landfills is around $16.6 billion. That averages out to about $66 million per site. This is a price that many would-be competitors can't afford. You could never recreate this network without spending substantially more than today's book value.

The large network provides another benefit for the company. It allows Waste Management to bypass competitors. Waste Management prefers for its trucks to deliver to its own landfills. That means it doesn't have to pay fees to use a competitor's landfills, helping Waste Management generate higher margins and cash flows.

By the numbers, Waste Management's strength is clear...

The company's margins are very consistent and generally expand with the size and scale of the business. As long as this business retains its competitive advantages, Waste Management should be able to maintain steady margins moving forward.

While it has more debt than cash ($13.5 billion in debt versus $3.1 billion in cash), its balance sheet is strong.

Waste Management also has no trouble covering its interest expenses. Its earnings are more than 6 times fixed charges (interest and lease expenses), and its net debt is just 2.3 times earnings before interest, taxes, depreciation, and amortization ("EBITDA").

And Waste Management gushes free cash flow ("FCF")... one of our favorite metrics when looking at a company. It's a measure of a company's cash profits minus capital expenditures. (Cash profits are the cash a company generates from its operations. Capital expenditures are the cash needed to maintain equipment and invest in new buildings, equipment, and software.)

Waste Management is a consistent cash-gusher that has increased FCF every year for the past six years. It produces an FCF margin of 14%. That means for every dollar in sales, $0.14 comes down to FCF. That's a great margin.

With this free cash flow, the company loves to reward its shareholders...

Waste Management is an excellent dividend-payer. It has raised its dividend every year for 17 years in a row. The dividend has grown roughly 7% annually for the past five years.

And it buys back shares, too. More importantly, it does so at the right time. We like companies that buy back shares when the stock is cheap, rather than those that repurchase shares at all-time highs.

The power of this strong business is evident in the share performance...

Since bottoming on April 1, WM shares have rebounded 32%. While this is less than the 40% return of the S&P 500 Index over the same time, WM's stock has outperformed over a longer time frame... more than doubling over the past five years. That beats the 67% return for the broader market over that period.

Waste Management may have a "boring" business that many people don't think about, but it dominates its industry. The advantages over its competitors helped build a strong balance sheet, which fuels its capital returns to shareholders through buybacks and dividends.

Sometimes investing is simple.