Is Waste Management a Safe Dividend Stock to Buy Right Now?

Waste Management informed investors that its revenue outlook for the rest of this year is lower than expected and so the company narrowed its guidance. However, they're still forecasting significant profit expansion. In fact, they increased their operating margin forecast for the full year with improvement in efficiencies resulting to improvement in cost savings. So all that being said, is Waste Management a safe defensive dividend stock for investors to buy right now? Let's take a closer look and answer that question together. I want to thank The Motley Fool for sponsoring this video. Visit fool.com/parquave for the 10 best stocks to buy now. You might be surprised to see that Waste Management has grown its revenue excellently over the previous decade. Now, some of that is due to acquisitions and the company made a few hundred million dollars of acquisitions in the most recently completed quarter. However, some of that is due to organic growth and price increases. For the current year, the management team expects another 5 and 1/2% price increase. Overall, over the previous decade revenue has nearly doubled to 25.7 billion. That's healthy growth for a business that's not known for growing revenue. Now, despite macroeconomic headwinds including fuel surcharges, the company's operating profit margin has been solid ending at 15 or I should say 18.5% over the trailing 12-month period. Cost inputs are probably the highest variable input into the company's business. Revenue is more or less known combined with price increases, the business is not all that volatile. That's why it gives investors a bit of diversification in their portfolio. There is some correlation to macroeconomic activity, but the business is not fluctuating up and down based on people's job prospects or people's disposable income. That's one reason why investors are attracted to stocks like Waste Management because it gives them some separation from macroeconomic performance where most of the stocks in your portfolio are considerably more exposed. So, this is a asset intensive or capital intensive business. It's not one of those asset light business models. It requires a lot of capital to be reinvested year after year. And so, you want to know the effectiveness of management's ability to allocate capital. Waste Management has been average to below average in this regard. Its return on invested capital over the trailing 12-month period was 8.6. And if we look at the average over the previous decade, it's barely 10%. So, they're not very good at this by any stretch of the imagination. You could argue they're average or below average in this regard. Waste Management's valuation is now closer to the cheaper end of where it's been over the previous years. And primarily due to the macroeconomic headwinds and management's guidance for lower revenue growth expected this year. It's now trading at a forward price to earnings of 23. Just a little over a year ago, the stock was trading at a forward price to earnings of over 30. Now, as I mentioned, the stock is attractive for investors for reasons beyond just the individual characteristics of its business model. The diversification in your portfolio adds extra value. Today, I also revised my estimates for Waste Management in my discounted cash flow valuation model. My estimates were revised slightly higher from the previous time I updated this spreadsheet. I now expect slightly more free cash flow from this business, but I'm not forecasting significant growth. In fact, for 2026, I'm estimating $3.8 billion in free cash flow, and that figure only grows to $4.8 billion by 2030. So, just $1 billion in free cash flow growth, or roughly 25% free cash flow growth over these next 4 years, is what I'm estimating for Waste Management. So, if the company beats those expectations, which is not very difficult to do, given the modest expectations I've valued, then it would be an upside to my current fair value estimate. I calculated a fair value for Waste Management at $199 per share. The current market price is $211. Given I like to apply a margin of safety, I could say that Waste Management stock looks fairly valued. Whether I'm looking at it on a discounted cash flow basis, or whether I'm looking at it on a forward PE multiple, the stock looks fairly valued. So, with Waste Management, investors are getting a defensive stock that's not strongly correlated with the macro economy, that adds diversification in your portfolio. So, given these characteristics, plus a fair valuation, and given the state of the economy, I'm ranking Waste Management stock as a buying opportunity. I like the risk versus reward, because the risk is relatively low, and the reward is modest, as well. That said, I have a low conviction level, low confidence level in this ranking, primarily due to the valuation and the cost headwinds the business is facing.