During 2018, WM’s biggest customer represented just 1% of its annual revenues. The public sector (municipal customers) accounts for 21% of the firm's revenue, and the largest private industries are retail and offices at 10% each.
Waste Management has paid higher dividends every year since going public in 2004.
First, there just aren’t any viable alternatives to trash disposal today. Consumers and businesses alike need to have their garbage collected and taken off-site. With the average American generating a couple pounds of trash each day, there is a constant need for Waste Management’s services.
But why does Waste Management have such a strong market position? This is when the company’s valuable, hard-to-replicate network of assets comes into play.
Waste that is not recycled or processed into forms of energy is taken to transfer stations, which consolidate waste into larger, long distance trucks. These trucks then take the waste to disposal facilities and landfills that are usually located somewhat far away.
Waste Management owns over 280 landfills, about as many as its next two largest competitors combined. The number of landfills has fallen from over 7,600 in the mid-1980s to about 2,500 today. That’s over a 65% decrease in less than 30 years!
Government regulations, neighborhood restrictions, high start-up costs, and environmental concerns have all played a factor in the decline of available landfills.
Waste Management’s ownership of key assets, dense trash collection network, and tipping fees allow it to maintain a lower cost profile than its peers. The company then attracts more waste volume from customers, which results in greater route density and higher returns on its invested capital compared to peers.
Furthermore, Waste Management’s large network of recycling facilities, transfer stations, and landfills make its business more flexible to meet the needs of virtually any customer segment – municipalities, construction sites, healthcare facilities, commercial buildings, and many others. Generally speaking, customers prefer to contract with proven operators that can meet a variety of needs.
While Waste Management might look like a mundane business in a commodity industry, this is good from a long-term investment perspective since the company’s business model is less prone to technology disruption and possesses several hard-to-replicate advantages.
Today customers are clearly more aware and working towards reducing the amount of waste they generate. Large customers such as grocery stores and restaurants are choosing to divert their organic waste from landfills to other alternatives, for example.
If anything, the (slowly) increasing shift towards recycling and renewables could further strengthen the market positions of the biggest players because smaller competitors are unable to make the vertical integration investments needed to compete. Whether or not these activities will be equally profitable is another question, but Waste Management should find a way to stay relevant with its scale and collection of assets.
Overall, the company's management team seems likely to remain conservative with how they run the business and adapt it to meet evolving waste management trends. Although the industry remains fiercely competitive, Waste Management is in a position of strength thanks to its leading market share, superior technology, and economies of scale. The business should benefit from continued industry consolidation and any improvement in economic activity.
Closing Thoughts on Waste Management
As the industry’s largest player, the company possesses strong operational and technical capabilities with economies of scale that result in significant advantages over its competitors.
From its dense network of well-placed assets to its annuity-like revenues (the average commercial and industrial customer stays with WM for 10+ years) and ownership of increasingly scarce landfills, Waste Management is a business built to last.
Thanks to its defensive profile, excellent free cash flow generation, investment grade credit rating, and wide moat, the company seems very likely to continue growing its dividend at a healthy clip going forward, something Waste Management has done every year since 2004.