Waste Management Inc. (WM) provides integrated waste management services in North America. The company is engaged in collection, transfer, recycling, disposal, and waste-to-energy services. WM is neither a dividend aristocrat nor a dividend achiever. In fact, WM has started showing some dividend growth trends in last five years. While I am presenting and showing data from last 10 years, I am only using last five years of dividend data. My objective here is to understand if WM has any potential to be a dividend achiever.

Trend Analysis
Since WM has recently started growing dividends, I am looking at trends for past 5 years of corporation’s revenue and profitability. The parameters should show consistently growth trends. The trend charts is shown in image below and for background reference I have plotted data for past 10 years.

• Revenue: Overall stable and consistent revenue in last 5 years. The average revenue growth for last 5 years is 3.2% (with 3.1% std. dev). While it shows stability, it shows company facing growth challenges.
• Cash Flows: Relatively increasing trend for operating cash flow. The corporation has a consistently higher operating cash flow, two times the net income or free cash flow.
• EPS from continuing operation: In general, the EPS also has an increasing tread since year 2003 with average growth rate as 9.8% (17.5% std dev). Most of that growth is coming in 2004 and 2005. After that is more or less constant. With relatively flat revenues, the EPS growth is most likely coming from operational efficiencies and share buybacks.
• Dividend per share: Dividends per share are consistently growing for the last 6 years, including the most recent 2009 dividend increase.

Risk Parameter Calculation
Here I use the corporation’s financial health to assign a risk number for measuring risk-to-dividends. The risk number for risk-to-dividends is 2.00. This is a medium risk category as per my 3-point risk scale. The factors that are making it medium risk-to-dividends are increasing payout factor and high variability in EPS.

Quality of Dividends
This section measures the dividend growth rate, duration of growth, consistency over a period of past ten years.

• Dividend growth rate: The average dividend growth (9.6%) is very much similar to average EPS (9.8%) growth rate. However, the EPS has a very high variability (sometimes negative growth).
• Duration of dividend growth: Dividends have continuously grown for the last 5 years. Before 1998 in its pervious incarnation, before WM, the corporation has consistency paid dividends for more than 25 years. However, not a consistently growing dividends.
• 4 year rolling dividend growth rate for past ten years: No
• Payout factor: In the recent past 5 years, it has been consistently less than 50%. This provides little flexibility and room to grow dividends.
• Dividend cash flow vs. income from MMA: Here, I analyze how the dividend cash flow stacks up against the income from FDIC insured money market account. The baseline assumption is (a) stock is yielding 3.8%; and (b) MMA yield is 2.4%. Considering the average dividend growth rate of 9.6%, the stocks dividend cash flow at the end of 10 years is 2.9 times MMA income. If we assume my average expected growth rate of 3.2%, then the dividend cash flow is only 1.70 times MMA income.

Fair Value Calculation
This section determines what price I should pay to buy a given stock

• Net present value (NPV) price based on 15 year DCF: $15.35
• Average high yield price calculated based on past 10 years: $39.8
• Pricing based on past 10 year relative price-to-earnings ratio. $44.0
• Pricing based on price-to-earnings ratio of 12: $26.1
• Graham number: $9.9

The range of fair value is calculated as $19.1 to $26.7.

Qualitative Analysis
The strength of WM business is its well established distribution network and existing market share of approximately 30%. The closest competitor has half of that market share. Putting this in context of economic environment, it has opportunity to grow due to its pricing ability and leveraging existing distribution network.

• This quantitative analysis shows that, in last 5 years WM has been able to bring in some level of stability in revenues, profitability, and operating margin. While the corporation is able to maintain consistent operating cash flow, it facing challenges in growing that cash flow. The EPS also has high volatility. Due to its low payout factor, corporation has been able to grow dividends for last 6 years.
• Assuming that the corporation’s existing trends in profitability and growth continue ‘as is’, I expect dividend growth to slow down relative to its 5 year average.
• The company expects to continue to maintain its cash flow.
• The company plans to use its free cash flow for debt reduction, dividends, and share buyback.

Conclusion
WM raised its annual dividend for 2009 from $1.08 to $1.16 per share. This increase shows corporation’s confidence in its free cash flow. For 2009, I believe this increase is ably supported by its cash flow. The stocks risk-to-dividend number is 2.00 (medium risk category). The current pricing of $30 is very close to my fair value range. I would be open to adding WM in my portfolio as long as my asset allocation allows. I expect WM to provide long term value and sustainable current dividends (and slow dividend growth).

Full Disclosure: No position at the time of this writing.

This article was originally published on The DIV-net on May 21, 2009

T. Rowe Price Group is a publicly owned corporation, a holding group, and an investment manager. The firm provides its services to corporations, corporate, public, and Taft-Hartley retirement plans, foundations, and endowments. It is modeled as an asset manager.

TROW is a dividend achiever and has been paying growing dividends for last 10 years. In one of my earlier post, I listed few companies that may have potential for dividend growth investments. TROW was one of them I had shortlisted for more analysis. Keeping with that, my objective here is to analyze if TROW is a good dividend growth stock and risk of dividends associated with it.

Trend Analysis

Here I am looking at trends for past 10 years of corporation’s revenue and profitability. These parameters should show consistently growth trends. The trend charts and data summary are shown in images below.

• Revenue: In general, slowly growing trend, but not consistent (down years in 2001 and 2002). The average revenue growth for last 10 years is 15.3% (with 12% standard deviation).
• Cash Flows: Increasing trend for operating cash flow (except a dip in year 2008). The free cash flow very close to the net income. There is little flexibility in allocating cash for dividends.
• EPS from continuing operation: In general, this follows revenue trends. Slowly growing trend (with dips in 2001 and 2002)
• Dividends per share: Consistently growing dividends.

TROW: Trends

TROW: Data Summary

Risk Parameter Calculation

Here I use the corporation’s financial health to assign a risk number for measuring risk-to-dividends. The risk number for risk-to-dividends is 2.14. This is a medium risk category as per my 3-point risk scale.

Quality of Dividends

This section measures the dividend growth rate, duration of growth, consistency over a period of past five years.

• Dividend growth rate: The average dividend growth of 25.2% (stdev. 8.34%) is more than average EPS growth rate of 17.8% (stdev. 22%). The two years where EPS were negative, has effect this calculation. If we remove the two negative years, the dividends seem to be well covered. The low payout factors allow for this flexibility and help cover for dividends.
• Duration of dividend growth: In recent times, dividends have grown only since last 10 years.
• 4 year rolling dividend growth rate for past ten years: More than 10%.
• Payout factor: In the past 10 years, it has been consistently less than 50%. In 2008 it increased to 53%. This is an indicator to keeping watch for dividends reduction.
• Dividend cash flow vs. income from MMA: Here, I analyze how the dividend cash flow stacks up against the income from FDIC insured money market account. The baseline assumption is (a) stock is yielding 2.6%; and (b) MMA yield is 3.4%. Considering the last 10 year average dividend growth rate of 25.2%, the stocks dividend cash flow at the end of 10 years is 4.27 times MMA income. However, with my projected dividend growth of 15.3%, the dividend cash flow is equal to 2.04 times MMA income.
  

Fair Value Calculation

This section determines what price I should pay to buy a given stock

• Net present value (NPV) price based on 15 year DCF: $20.4
• Average high yield price calculated based on past 10 years: $48.5
• Pricing based on past 10 year relative price-to-earnings ratio. $45.6
• Pricing based on price-to-earnings ratio of 12: $24.5
• Graham number: $19.1

The range of fair value is calculated as $24.5 to $31.6. This is determined by taking average (for high value) of above five parameters and then subtracting it with half the standard deviation (for low value).

Qualitative Analysis

TROW’s strength is its business model of asset managements. It manages money for individuals, high net worth individuals, pension funds, corporate funds, and endowments’. It is considered as one of the conservative asset management company.

• The company does not have any debt, does not need for credit for its operations, or does not need credit for its growth. This is a significantly good characteristic.
• Since it operates as an asset manager, it is relatively a stable industry i.e. less cyclic.
• It is likely to be beneficiary of the baby boomer driven demographic shift needing money management services. It has an excellent positioning to reap benefits from this segment.
• Current financial turmoil does not seem to have had a game changing effect on its businesses. However, it has experienced slow down.
• It is expected to face short-to-intermediate term challenges due to recession driven slow down.

Conclusion

The dividend cash flow is twice that of MMA income based on current yield of 2.6% and conservative estimate of dividend growth (15.3%). The stocks current risk-to-dividend number is 2.14 (medium risk category). TROW is a dividend achiever and has been raising dividends for last 10 years. In addition, this analysis is showing that TROW continues to be potentially good dividend growth stock with medium risk to dividends. I will be open to initiate a long position when the stock price falls within my fair value range.

Full Disclosure: No position at the time of writing. I may open long position in near future.