Welcome to the Stock of the Day.
Waste and environmental services company Waste Management (WM) announced fourth-quarter results and a hefty new stock buyback program. With a 3.3% dividend yield and a firm handhold on the nation’s garbage collection market, could one man’s trash be a treasure in your portfolio?
Let’s find out.
With nearly $14 billion in annual sales, Waste Management is the second largest player in the Industrial Goods industry. Waste Management runs a network of over 350 collection operations, 350 transfer stations, 270 landfills, 130 recycling plants and 110 landfill gas projects. This company also stands apart in terms of its 3.3% dividend yield, which is second-highest in the industry.
In 2013, Waste Management returned over $900 million to its shareholders in the form of dividends and stock buybacks, and it clearly intends to continue this trend. Before the opening bell Tuesday, Waste Management announced that its board approved a modest hike in its quarterly dividend, from 36.5 cents per share to 37.5 cents per share. The company will likely declare its first-quarter dividend before the end of the month. Additionally, the company has authorized a new $600 million stock buyback program for 2014.
Waste Management also reported a Q4 loss of $607 million, or a loss of $1.29 per share, on $3.5 billion in revenues. In the year ago period, Waste Management had reported net income of $224 million, or $0.48 per share, on $3.43 billion in sales.
So while WM announced 2% annual sales growth, the company is experiencing margin compression from accruals related to incentive compensation and risk management. Excluding special items, adjusted EPS was 56 cents per share. Analysts had expected 61 cents per share on $3.58 billion in sales, so Waste Management missed both consensus estimates.
Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. Over the past 12 months, Waste Management stock has wavered between a C-rated hold and a B-rated buy. What Waste Management has been struggling with lately has been its history of beating analyst earnings estimates, its sales growth and cash flow.
And while WM currently receives solid marks for operating margin growth, earnings growth, earnings momentum and analyst earnings revisions, I expect these grades will fall once the latest quarterly results are plugged in.
This should drag down the stock’s B-rated Fundamental Grade. Meanwhile, WM receives a C for its Quantitative Grade because there is lackluster buying pressure for this stock.
Bottom Line: As of this posting I consider Waste Management stock a C-rated hold. While it’s exciting to see the company returning value to its shareholders, there are still lingering problems with sales and earnings growth that cannot be ignored.
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