Friday, January 10, 2014

Stock Analysis of Republic Services

Republic Services, Inc. (RSG), together with its subsidiaries, provides non-hazardous solid waste collection, transfer, and recycling and disposal services for commercial, industrial, municipal, and residential customers in the United States and Puerto Rico. The company has paid dividends since 2003 and has increased them for ten years in a row.

The company’s last dividend increase was in July 2013 when the Board of Directors approved a 10.60% increase in the quarterly annual dividend to 26 cents /share. The company’s peer group includes Waste Management (WM), Waste Connections (WCN), and Veolia (VE).

Over the past decade this dividend growth stock has delivered an annualized total return of 9.90% to its shareholders. The largest shareholder with an approximate 25% stake is Bill Gates, through his holding vehicle Cascade Investment LLC.


The company has managed to deliver a 6.40% average increase in annual EPS between 2003 and 2012. The company is expected to earn $1.87 per share in 2013 and $2.01 per share in 2014. In comparison, the company earned $1.55/share in 2012.

Republic Services increased Returns on Equity from 5.70% in 2003 to over 21% by 2007. There was a big drop during the financial crisis, and currently the ROE is standing at 7.40%. Based on forward earnings, I expect this ratio to increase above 10%. I generally want to see at least a stable return on equity over time. I use this indicator to assess whether management is able to put extra capital to work at sufficient returns.

The annual dividend payment has increased by 12.80% per year over the past five years, which is higher than the growth in EPS. This has been achieved mostly due to the expansion of the dividend payout ratio.

A 12% growth in distributions translates into the dividend payment doubling almost every six years on average. Future dividend growth would have to track growth in earnings per share, and would likely be in the high single digits.

The dividend payout ratio has increased from 9% in 2003 to almost 59% in 2012. Looking at estimated earnings for 2013 however, the forward dividend payout ratio is 56%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Republic Services is attractively valued at 18.50 times estimated 2013 earnings, yields 3% and has a sustainable distribution. The company has stable revenues, which are relatively recession resistant. However, growth has been a little slow in the past five years. If earnings per share grow by 2 – 3%/year based on organic growth (such as growth in population) and acquisitions, and 2-3%/year due to share repurchases, this could translate to total growth of 4 – 6%/year. Given the high dividend payout ratio, I am not sure if long-term dividend growth would be higher than 6%/year over the next 5 - 10 years. This is not too bad of course, given a starting yield of 3%. However, if I find a stock that yields 3% and expect it to grow distributions above 6%/year, I would likely buy that stock, rather than Republic Services.

Full Disclosure: None

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