Waste Management (NYS: WM) provides transfer, recycling, and disposal services for the residential, commercial, industrial, and municipal sectors within the United States, where it also operates waste-to-energy and landfill-gas-to-energy facilities.

Today, let's look at three things investors should be watching regarding Waste Management, as they'll provide us better insight into the company.

1. Green energy initiatives
There are few companies out there doing as much to help the environment as Waste Management. That's a bit of an oxymoron considering that Waste Management operates dozens of landfills, but it's what steps the company has taken with the trash prior to and after it hits those landfills that's important.


Waste Management is the largest recycler in the U.S. and is able to use other people's trash to add to its bottom line. Metal prices will somewhat determine how profitable its metal recycling segment is, but recycling of any form helps drive down costs and eliminate harmful products from re-entering the environment.

Also important is Waste Management's use of landfill gas, which it uses to generate about 550 megawatts of electricity and power about 440,000 homes. The company's plan is to double this electrical output by 2020. In addition to powering homes, Waste Management has also devised technology capable of using this gas to fuel some of its vehicles. Clean and cheap energy is one major factor to Waste Management's future success.

2. Industry consolidation
One advantage Waste Management has over its competitors is its sheer size. Having such a large company and possessing green technologies to a scale far beyond its peers allows it to command significant pricing power when it comes to disposing of trash. One aspect that could thwart that dominance is industry consolidation. Therefore, it's imperative to keep an eye on Waste Management's peers.

Republic Services (NYS: RSG) is Waste Management's largest competitor, and it became so by purchasing Allied Waste (then the third-largest waste services company) in 2008. Similarly, Waste Connections (NYS: WCN) purchased Alaska Waste Company earlier this year and announced that it had positioned its balance sheet in the first quarter for an increase in acquisition activity. This is a sector where being bigger means better pricing power, and waste-management companies will look to grow as large as regulators will allow.

3. Dividend growth
I know I might sound like a broken record with telling investors to keep their eyes on the payout prize, but it makes a lot of sense in regard to Waste Management.

One major aspect of the waste-services sector that can't be ignored but I've yet to touch on is that it's a necessary service. There will always be trash and therefore always a need for Waste Management's disposal and transportation services. What this means is that Waste Management's cash flow will always be fairly predictable even though its growth expectations will be somewhat tempered by its size and the amount of trash produced. That's why it's important to keep an eye on Waste Management's dividend growth.

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Source: Dividata.
*Assumes quarterly payout of $0.36 for remainder of fiscal 2012.

Source: Dividata.
*Assumes quarterly payout of $0.36 for remainder of fiscal 2012.

Since paying out just $0.01 in 2003, Waste Management's dividend growth has exploded, and the company currently pays out a 4.3% yield. Although it isn't the highest yield in the sector, I consider it the safest.

Veolia Environnement (NYS: VE) , a top pick of Foolish colleague Brian Stoffel, slashed its payout earlier this year and is targeting a 7.35% yield through 2013. However, international pressure could continue to challenge its dividend.

Keeping an eye on Waste Management's dividend growth is the final key to understanding this company.

Foolish roundup
Now that you know what to watch for, it should be easier to analyze Waste Management's successes and pitfalls in the future, and with any luck you'll gain a competitive investing edge.

If you're still craving even more info on Waste Management, I would recommend adding the stock to your free and personalized Watchlist so you can keep up on all of the latest news with the company.

Waste Management isn't the only solid dividend-paying company. Our team at Motley Fool Stock Advisor recently highlighted nine companies that could provide you with the income and stability you need to sleep at night, despite a volatile market. Get your copy of this special report.

At the time this article was published Fool contributor Sean Williams has no material interest in any of the companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Waste Management. Motley Fool newsletter services have recommended buying shares of Waste Management, Republic Services, and Veolia Environnement, as well as writing a covered strangle position in Veolia Environnement. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services don't 30 days. The Motley Fool has a disclosure policy that smells only of success.

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Peter Anderson

The business model for market power by the waste industry duopoly, Waste Management and Republic, depends upon control over and customer dependence on landfills, without which the current high barriers to entry into the business erode.

In view of the fact that nationally (locally varies widely) there is almost 20 years of remaining capacity, which is twice what is needed and a mark of significant overcapacity coming into the present era, and in view of the further fact that secular changes going forward are actually decreasing per capita waste generation, the mid-to-long-term viability of this premise cannot blithely be assumed.

Indeed, the biggest threat that must be monitored to reliably call any turning points for the industry is organics, which are almost two-thirds of the trash buried in landfills. Much of the country already bans yard trimmings from landfills, and the fledgling trend is to add food scraps and soiled paper, which represents about a quarter of today's discards, which would effect a body blow to the industry's market power, leading to a death spiral.

Those who want to make money shorting the industry just before things go south should monitor when or if the drift to food scrap recovery get's sufficient force to be ready for lift off.

July 09 2012 at 3:25 PM Report abuse rate up rate down Reply