Waste Management

The money is lying in the street

Garbage doesn't sound particularly attractive at first, does it? Who wants to say they have garbage stocks in their portfolio? I thought so for a long time too, until I finally came across an article about the investments of Microsoft founder Bill Gates. He has long been a major shareholder in Waste Management. And if you take a closer look at this company, you quickly understand why.

Garbage is undoubtedly a megatrend. Especially in the USA, enormous amounts of garbage are produced. And this amount will definitely keep rising. So for an environmentally conscious and also hygienic future, it's enormously important that we properly dispose of and recycle this garbage. Waste Management, the largest waste disposal company in the USA, is ideally positioned in this field. With its truck fleet, WM collects the garbage of 21 million municipal, commercial and industrial customers, recycles it and uses the resulting gases to generate renewable energy.

The origins and business model of Waste Management Inc.

It's probably hard to imagine today, but not all that long ago it was common to simply throw your garbage out into the street. Mountains of trash piled up there, everything stank terribly and attracted rats. That all of this also brought diseases with it is probably self-explanatory. That changed in 1893, when Harm Huizenga, a Dutch immigrant, collected garbage in Chicago's suburbs with his horse-drawn wagon for a small fee of $1.25/wagon. He built up a reliable customer base and founded the Huizenga & Sons Scavenger Co. (scavenger - in German "Straßenkehrer"). As industrialization progressed, more and more garbage was produced, and Huizenga was able to expand his business. But the work was hard, and only very few could do it for long. Nevertheless, 3 of his sons (Sam, Tom and Peter) also built their own garbage hauling companies. Gerrit, the 4th son, decided against it and moved away with his family.

It's exactly at this point in the story that Gerrit's son Harry Wayne Huizenga comes into play. He first grew up in Illinois until his family moved to Florida. There he graduated from high school, but then felt the urge to move back to his relatives and friends in Chicago. He enrolled at Calvin University, but dropped out after 2 semesters. For about 5 years he tried to keep his head above water with odd jobs, until he finally enlisted in the Army for almost 6 months in 1959. Back in Florida, he wanted to follow in his grandfather's footsteps and start his own waste disposal company. He borrowed $5,000 from his father and talked a competitor into selling him a truck. The company Southern Sanitation Services was born. It was an extremely lucrative time to get into the waste treatment industry. The economy was doing great, and consumers were being flooded with new products. On top of that, the era of disposable products was now beginning. Dean Buntrock, who was married to Peter Huizenga's daughter Betty, noticed this too. When Peter died in 1956, he left behind his company Ace Scavenger Service. Dean, who had actually trained in insurance sales, was asked to continue running the business. At that time it had 15 collection routes, each bringing in $4,000/month, and a garbage incinerator that brought in around $800 a month. Soon he got to know Betty's cousin Wayne, and the two started making first plans for a merger.

The passage of a new law on solid waste disposal in 1965 prescribed new hygiene and safety standards. Smaller or less developed companies were thus pushed out of business. Implementing the new regulations required a lot of investment. For Buntrock and Huizenga it quickly became clear that they now had to put their plans into action. Step by step, the two merged their companies under the new name Waste Management Inc.. Larry Beck, the 3rd founding member, also integrated his disposal business Atlas Disposal, which operated on the South Side of Chicago. The three of them steadily expanded their business and moved into more states. Of course, such strong expansion swallows a lot of money. And since they didn't want to constantly beg banks for loans, they decided to go public in 1971. The fresh capital made it possible to expand the business across all of North America. Today Waste Management is the largest waste disposal company in the USA. It serves all facets of waste management, from recycling and waste recovery to hazardous waste management to energy generation from landfill gases.

How will Waste Management's business fare in the future?

As briefly mentioned in the introduction, the USA is the world champion in producing garbage. To put it in numbers: on average, every American produces 773 kilograms of garbage per year. Just imagine that. Not every household, but every American, young and old. And the trend keeps rising. On the one hand, of course, that's due to the growing population, but on the other it's also due to all the disposable products. More and more people order their food online - and what comes of it? More garbage. More and more products are individually wrapped in plastic - and what comes of it? Exactly, more garbage. Despite environmental regulations and possible bans, the consulting firm McKinsey expects a worldwide increase in plastic waste of 80 percent by 2030. So Waste Management has its hands full.

One topic that should surely please WM as well is China. The Middle Kingdom imposed a ban on garbage imports. For years, garbage from all over the world was shipped to China to be disposed of there. But now China has pulled out of the business, triggering quite a garbage crisis. So waste disposal companies like Waste Management are now getting even more contracts, and the stock merrily shot up.

In general, Waste Management runs a very stable and crisis-proof business model. Just imagine what would happen if a company like this went on strike or had to shut down its business completely because it wasn't lucrative enough. Chaos would definitely break out - not to mention all the hygiene problems. Waste Management also has a natural moat. No new player can come onto the market and simply open new landfills. That's because the US no longer issues permits for them - landfills stink, make noise and are generally not welcome in the neighborhood. So you have to rely on existing landfills. And Waste Management has a whole 293 of them spread across North America. Its fleet of almost 26,000 trucks can't be replicated that quickly either. By the way, 6,500 of these trucks already run on self-produced gas, and the number keeps rising.

In order not to grow only on its own, the company of course also relies on lucrative acquisitions. Most recently it bought the small waste disposal company Miller Sanitation, which operates in southwestern and central Minnesota. That adds another 2,500 residential customers and about 500 commercial customers to Waste Management's portfolio. Apart from Miller Sanitation, in April 2019 the company announced it would take over its big rival Advanced Disposal for the hefty sum of 4.9 billion US dollars. This acquisition is scheduled to close before the end of the first quarter of 2020.

And what about the dividend?

Shareholders have been receiving a regular profit distribution since 1986. But since the company reinvested its profits in growth itself for a while, this dividend was never raised much. That only changed in 2004. Since then the dividend has been raised every year, by an average of around 5.5% (average over the last 10 years). The current dividend yield is around 1.6%, and the payout ratio, at a little over 50%, is still in the green zone. So there's still enough money left in the company to keep growing steadily.

Conclusion:
I like companies that you can't do without, or only with extreme difficulty. And Waste Management is exactly that kind of company - as I said: imagine the scenario that would play out in the USA if WM stopped disposing of garbage. So you've got a stable, high-growth and crisis-proof investment. Personally, I can well imagine investing in Waste Management, but I'd still like to wait for a small correction here.