'Waste-full' Is Good for the Long Haul

NEW YORK (TheStreet) -- Are you as happy that the elections are over as I am? Whether your candidates or your referendums were successful or not, it's time for Americans to go forward with optimism and profitable activities.

As one of the great First Ladies, Eleanor Roosevelt wrote, "Yesterday is history, tomorrow's a mystery and today is a gift. That's why it's call 'the present'." That's true for every one of us in every moment of our lives. Today I'll share with you "a gift" that will keep on giving as long as there are humans.

In America, we throw away 195 million tons of trash and garbage each year. Evidence suggests that each American generates almost five pounds of trash every day. Yes, we are also fairly adroit at recycling, but humanity seems more predisposed to the generation and disposal of mountains of waste.

The "gift" in that knowledge involves a handful of publicly traded companies who make billions of dollars picking up and sorting through our tons of trash, as well as recycling most recyclable materials. One of the biggest and most prolific of these companies is Waste Management ( WM) with its generous dividend yield of around 4.4%.

WM is waste-full in the sense that every day its trucks, containers and dumpsters are filled to overflowing with lots and lots of garbage and trash. Unless we want the rats and cockroaches to take over, companies like WM will be very much needed and paid accordingly.

The company is also committed to waste-to-energy and landfill gas-to-energy facilities in the U.S. This sometimes doesn't catch the media's attention, but WM continues to practice a form of sustainable energy production.

This includes capitalizing in landfill gas-to-energy operations where WM is recovering methane gas produced naturally as waste decomposes in landfills for use in the generation of electricity. They are understandably proud of this and their recycling emphasis as you can see at their user-friendly Web site.

WM's collection services include picking up waste and recyclable materials and transporting both to a transfer station, material recovery facility or disposal site. Their extensive recycling operations include materials processing, plastics materials recycling and commodities recycling.

In addition, it provides recycling brokerage services consisting of managing the marketing of recyclable materials for third parties. A growing niche is their electronic recycling services, which involves the collection, sorting and disassembling of discarded computers, communications and other electronic equipment.

After the markets closed on Tuesday, Waste Management announced their latest quarterly cash dividend of 35.5 cents per share payable Dec. 14 to stockholders of record on Nov. 28, 2012. This $1.42 annual dividend represents a rather lofty 70% payout ratio of the company's earnings.

Due to that fact and also that their five-year expected PEG ratio has swelled to 2.58, I'd rather keep an eye on this company to see how their next quarter's earnings and revenue growth unfolds. Their last quarter saw a year-over-year 21.58% decrease in earnings, with quarterly revenues falling by almost 2%.

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The key financial numbers for one of WM's publicly traded competitors, Republic Services ( RSG) look strangely similar. Their dividend yield is less (3.48%) but so is their payout ratio (52%).

Like WM, I want to see a turnaround in RSG's earnings so their PEG ratio, which is just above 2, can fall to at least 1.5. The chart below compares the quarterly diluted year-over-year earnings per share of both companies during the past five years. RSG's earnings have been up and down like a yo-yo.

WM EPS Diluted Quarterly YoY Growth Chart WM EPS Diluted Quarterly YoY Growth data by YCharts

An alternative to WM and RSG is a lesser known company, Waste Connections ( WCN). The Woodlands, Texas-based company with a market cap of almost $4 billion not only operates many of the same waste disposal functions, but it also has some unique side businesses.

WCN owns and operates transfer stations that receive, compact and load solid waste to be transported to landfills via truck, rail or barge. In addition, it treats and disposes non-hazardous waste generated in the exploration and production of oil and natural gas. Serving the waste needs of the energy patch is a smart money-making concept.

They also offer intermodal services, including repositioning, storage, maintenance and repair of cargo containers for international shipping companies. These containers include ones in the rail haul movement of cargo and solid waste containers in the Pacific Northwest through a network of intermodal facilities.

To top things off WCN provides container and chassis sales and leasing services to its customers. As of March 31, the company owned or operated a network of 148 solid waste collection operations, 59 transfer stations, 39 recycling operations, 46 landfills, 7 intermodal facilities and 1 exploration and production waste treatment and disposal facility. It also served approximately two million residential, commercial and industrial customers from a network of operations in 30 states in the U.S.

Its dividend is only 1.24% but that represents a payout of just 27% of WCN's earnings. That means there's plenty of money with which to increase their dividend. Their operating cash flow (over the trailing 12 months) is over $417 million and their levered free cash flow tops $230 million.

As the chart below illustrates WCN has had a nice one-year run in both their share price and their earnings per share.

WCN Chart WCN data by YCharts

Interested investors may be well advised to wait for price pullbacks below $31 to initiate or add to positions of WCN. Its five-year PEG ratio is also over 2 so in my opinion either the price needs to come down or earnings need to accelerate meaningfully over this quarter and into 2013.

One thing we can count on is that the need for waste disposal and recycling isn't going to subside anytime soon. As communities rebuild in the aftermath of widespread calamities like superstorm Sandy, the need to haul away mountains of debris, clean up the messes, reclaim and recycle will be greater than ever.

Hopefully these companies will be direct beneficiaries and the extra income will fall directly to their bottom line. For now, watch them carefully and consider buying when and if their shares go on sale.

At the time of publication the author held no positions in any of the companies mentioned in this article.

Jim Cramer and Stephanie Link actively manage a real money portfolio for his charitable trust- enjoy advance notice of every trade, full access to the portfolio, and deep coverage of the latest economic events and market movements.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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