Battle for the Cash From Trash: Republic Services vs. Waste Management

There’s money to be made by hauling away the stuff nobody wants around anymore.

Despite how simple it seems on the surface, waste hauling can be a fairly lucrative business to be in for two key reasons.

First, virtually everyone creates a demand for waste services. Even places that are committed to “zero waste to the landfill ” will very likely need to contract with a waste hauler to get the recyclable waste away from their facilities and processed.

Second, landfills are very much a NIMBY -- Not In My Back Yard  -- resource. While most people appreciate the fact that landfills mean that trash doesn’t pile up in their homes, they don’t really want those landfills anywhere near them. That gives existing trash companies with landfills close to urban areas strong moats against new competition. 

With that in mind, Waste Management (NYSE: WM) and Republic Services (NYSE: RSG) are the two largest trash-hauling companies in the United States. Read on to see whether one of them may look like a better investment than the other.

Valuation comparison

Waste Management trades at approximately 27.6 times its forward earnings, with an expected annualized income growth rate of 8.5% over the next five years. Meanwhile, Republic Services trades at around 27.8 times its forward earnings, with an anticipated annualized income growth rate of 8.9% over the same period.

Because of how close those metrics are for both businesses, it certainly looks like neither one of them has a significant advantage over the other. The reality is that nobody’s projections of the future are perfect, but the fact that these two titans of trash appear similarly valued is a decent sign that the market is comparably confident in both of them.

Balance sheet comparison

Republic Services boasts a 1.2 debt-to-equity ratio, $132 million in cash, $12.3 billion in debt, and a current ratio of 0.74. On the other hand, Waste Management has a 2.3 debt-to-equity ratio, $257 million in cash, $15.4 billion in debt, and a current ratio of 0.87.

Now, here's the deal: when it comes to total debt level and debt-to-equity ratio (as long as it's above zero), the lower, the better for a company in the long run. On the flip side, a higher current ratio and cash level are favorable for a company in the short term.

Considering these factors, Republic Services gains a slight advantage from a balance sheet perspective due to its lower total debt and better debt-to-equity ratio. However, it's worth noting that in an industry like waste hauling, where demand remains relatively strong even during economic downturns, a company's balance sheet strength is less likely to be tested compared to businesses more exposed to economic cycles.

Dividend comparison

Republic Services sports around a 1.4% yield and a 41% dividend payout ratio, and within the past year, it increased its dividend by about 7.6%.  Waste Management offers investors around a 1.7% yield while having a 48% dividend payout ratio, and within the past year, it increased its dividend by about 7.7%. 

Since both companies have payout ratios in the 40s and anticipated growth rates slightly higher than their last dividend hikes, they both offer decent reasons to believe that dividend growth can continue. That said, this time, the edge goes slightly to Waste Management, due to its higher yield while still offering investors a supported dividend with the potential for growth.

All in all, it’s a fairly balanced competition

From a valuation front, Waste Management and Republic Services appear to be in lockstep with one another. Republic Services pulls a bit ahead from a balance sheet perspective, while Waste Management catches back up with its dividend. 

As a result, for investors looking to find treasure in the trash, it’s largely a matter of preference. More conservative investors may prefer Republic Services for its better balance sheet, while more aggressive ones may like Waste Management’s slightly higher income.

At the time of publication, Chuck Saletta’s wife owned shares of Waste Management.