Top picks 2012: Waste Management

Uncertainty in the markets could make the next two to three years excruciating for long-term investors. That�s why it�s important to pick the right stock in the right industry if you want to profit from your investments during the volatile years ahead.

Waste removal is an industry that is a critical component to any society. Every year, Americans throw away enough paper and plastic cups, forks, and spoons to circle the equator 300 times, and enough shopping bags to create 300,000 tons of landfill waste.

The amount of garbage being sent to landfills has almost tripled over the past 50 years. It brings up an obvious fact: humans make a whole lot of garbage.

You can�t count on the weather; you can�t count on the government; you can�t count on the stock market. But you can count on demand for good trash removal.

And the largest trash removal company in North America is Waste Management (WM). It provides collection, transfer, recycling, resource recovery, and disposal services throughout the U.S., Canada, and Puerto Rico. In 2010, it served nearly 20 million customers through 294 transfer stations and 271 landfills.
Waste Management does everything: manages landfills, sells recycled materials, transfers waste, and even creates energy from trash.

Such a diversified revenue stream adds to the company�s stability and provides several internal growth opportunities. What happens if people make more trash? WM makes money. What happens if people recycle more? WM makes even more money.

Waste Management may not turn lead into gold, but it does turn trash into cash. With a history of converting their cash into shareholder value, Waste Management's dividend has increased annually by an average of 7.7% over the past seven years.

The payout nearly doubled in value from $0.75 paid per share in 2004 to $1.36 paid per share in the past 12 months � a yield of 4.5%, more than twice the current yield on treasury bonds.

Of course, dividends aren't the only way to return money to investors. The $501 million spent on share repurchases in 2010 is a pretty clear example of this.

With another $575 million in share buybacks scheduled for 2011, Waste Management's impressive history of share repurchases is set to continue.

In its most recent quarter, revenue increased by 5% to $3.35 billion, up from $3.2 billion in the third quarter of 2010. It was the seventh consecutive quarter of year-over-year revenue growth.

This year I expect the company to generate $2.12 EPS from $13.3 billion in sales. Next year I estimate they will earn $2.36 EPS from $13.8 billion in revenue.

At $31, shares trade at 1.1 times sales and 13 times 2011 EPS. Though Waste Management is no longer a fast growing company, shares deserve to trade at least 15 times EPS, or $37.

It would take nothing less than a nuclear war to prevent Waste Management from doing its job. Until then, enjoy the 4.4% dividend and a great stock. Let Waste Management clean up your portfolio this year.