Finding Opportunities Where Others See Trash
April 17, 2019
At Profitable Investing, I’m always looking for opportunities from markets that are developing and evolving beyond just the general stock market. And I am constantly consuming vast amounts of news, media and data to find the next new opportunity and the companies taking the lead for more growth and income.
Right now, a great opportunity is showing up in one of the least likely parts of the economy: trash.
The US is a wasteful nation. And our consumer-driven economy doesn’t help. From delivery boxes to plastic and cardboard packaging to glass and plastic bottles and aluminum cans, millions of tons of trash are generated each year.
But not all of the tossed trash ends up being binned. Recycling has caught on in many neighborhoods around the country.
According to the US Environmental Protection Agency (EPA), the US generates some 66 million tons of recycling material each year. And out of those millions of tons, the largest single destination for that material is China.
Or at least it was…
Change of Plans
In January of 2018, the Chinese government announced that it was ending the import of recycling materials. This moratorium included stuff from the US, Europe and the rest of the globe.
China was done being a dumping ground. And in the continuing drive to improve the lives of its population, processing outsiders’ trash was no longer a viable business option.
This means US municipalities that were once paid by various recycling companies are now being charged to take away the trash.
And now that China’s out of the loop, there aren’t many US options. According to the non-profit Recycle Across America, the US recycling business has become dysfunctional over the past several years.
This has led to some dramatic changes around the US. For over the past year, some 300 municipalities have been forced to cancel recycling programs. In turn, they are resorting to filling up landfills at a faster clip.
At this point, many local authorities still have recycling bins and boxes that are picked up. But the collected materials are just dumped in landfills. Memphis, for example, has bins in the airport that collect water bottles, but they all get dumped in landfills.
This isn’t just a US problem. Major economies, including Canada as well as European nations from Germany to Ireland, are being forced to shift back to landfills. This even includes Great Britain—home to the British Broadcasting Corporation, which produced Sir David Attenborough’s Blue Planet II.
In this series, Sir David told horrendous stories relating to the world’s trash, particularly in the oceans of the globe that are swelling with plastic detritus killing off scores of wildlife.
With the shift from recycling programs to trash collection around the US, landfills are back in growth mode. And one of the leaders in this market is Waste Management (WM), as a broad play on the defensive nature of trash collection and landfills.
Waste Management shares have performed well, with a total return of over 180% over the past five years—far better than the return of the general S&P 500 Index for the same time period.
Waste Makes Profits
Waste Management’s Total Return Compared to S&P 500 Index—Source: Bloomberg Finance, L.P.
Its overall revenues continue to rise. Even with recycling margins compressing, operating margins remain strong, which is resulting in stellar returns.
It has regular cash flows on hand and little debt, making for a secure company. It’s shareholder friendly, as dividends have been rising by an average of 5.35% per year over the trailing five years.
Its payout ratio—the ratio of how much it pays out to shareholders versus what it keeps on hand for debt payments or reinvesting—is a mere 41.70%. That means it has a rock solid dividend and will for a long time to come, given the new trend in the industry.
While Waste Management and its landfills are a great way to play the recycling mess—I have an even more innovative play with even more dividend income that you can read about in my Profitable Investing advisory.