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Republic Services Dividend Outlook: Meh…Look Elsewhere

Slow earning growth may hinder dividend increases

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Republic Services (RSG), together with its subsidiaries, provides non-hazardous solid waste collection, transfer, and recycling and disposal services for commercial, industrial, municipal, and residential customers in the United States and Puerto Rico. The company has paid dividends since 2003 and has increased them for ten years in a row.

The company’s last dividend increase was in July 2013 when the Board of Directors approved a 10.60% increase in the quarterly annual dividend to 26 cents  per share. The company’s peer group includes Waste Management (WM), Waste Connections (WCN), and Veolia (VE).

Over the past decade this dividend growth stock has delivered an annualized total return of 9.90% to its shareholders. The largest shareholder with an approximate 25% stake is Bill Gates, through his holding vehicle Cascade Investment LLC.

The company has managed to deliver a 6.40% average increase in annual EPS between 2003 and 2012. The company is expected to earn $1.87 per share in 2013 and $2.01 per share in 2014. In comparison, the company earned $1.55 per share in 2012.

The company is the second largest provider of waste management services in the US, after acquiring Allied Waste in 2008.

I like the economics of the waste management business, and believe that Republic Services has a few ways to grow revenues over time.

First, the nature of its business is to provide an essential service that is relatively recession resistant. Over time, I would expect that the amount of trash volumes to only increase, as a factor of increasing population and level of industrial and societal output.

Second, the company benefits from economies of scale, as of 12/31/2012 it owned 191 landfills, 195 transfer stations and 71 recycling centers. Trash collection services generate over three quarters of revenues ( 35% municipal and residential, 40% commercial & 25% industrial), while transfer services and landfill generate about one-sixth. Recycling services generate the majority of any remainders. Landfills are difficult to set up and operate, and require companies to go through a lot of government red tape to obtain proper permits/licenses. In addition, landfills require high costs in setting up, monitoring etc. Thus landfill ownership could be viewed as a competitive advantage.

Third, the company can grow through acquisitions, especially those that complement its geographic presence in a certain part of the country. Currently Republic Services and Waste Management generate approximately 60% of revenues in the industry combined. Through acquisitions, the company can leverage its economies of scale, and generate synergies such as reductions in capital requirements and in personnel. If you have relatively fixed costs in terms of landfills, transfer stations and truck fleet, any marginal increases in volumes can result in much higher increases in earnings. In addition, the company seeks to achieve a high rate of internalization by controlling waste streams from the point of collection through processing or disposal.

Fourth, a large portion of the company’s contracts also include price hikes tied to inflation. In addition, it could contain costs by standardizing the truck fleet it operates, and switching it from diesel to natural gas. The company operates under one – five years contracts with municipal, commercial and industrial customers.

Fifth, the company can also increase earnings per share through regular share repurchases. Between 2003 and 2008, shares outstanding decreased from 240 to 192 million. After the acquisition of Allied Waste in 2008, the number of shares outstanding has decreased from 381 million in 2009 to 363 million in 2013.

The company can also leverage its existing position to generate new revenue streams. Examples include recycling centers as well as using trash to generate energy. These are existing operations, which could potentially generate extra money for shareholders. Currently, 35% of trash is recycled, and this percentage is expected to increase.

Article printed from InvestorPlace Media,

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