Why This Texas-Based Company's Stock Could Be a Strong Addition to Long-Term Portfolios

Whoever first quipped "one person's trash is another's treasure" was on to something. Houston-based Waste Management (NYSE: WM) has turned trash collection and disposal into a very lucrative enterprise. It generated $22 billion in revenue last year and pocketed nearly $3 billion in profit.

Demand for WM's services continues to grow, making it a reliable long-term investment. Here's why this Texas-based company could be a great addition to your portfolio.

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Turning trash into cash

Waste Management, or WM for short, is the leading provider of comprehensive waste management environmental services in North America. The vertically integrated industrial company has unmatched size and scale in the industry. It collects waste from commercial, industrial, residential, and other customers. The company also owns and operates transfer stations and landfills to support its operations and third-party customers. Additionally, it provides recycling services, medical waste services for healthcare companies, and generates renewable energy.

The bulk of the company's revenue comes from providing collection, transfer, and disposal services (89% last year). It provides collection services to customers under long-term contracts that typically last three years. Those agreements set pricing based on an index or one that increases prices at a market-based rate. As a result, WM's collection business generates very stable revenue that steadily rises. Over the past five years, its collection and disposal revenue has grown at around a 6% annual rate.

Recycling, healthcare solutions, and renewable energy are smaller but faster-growing segments. The company recently entered the growing healthcare waste market through its acquisition of Stericycle for $7.2 billion, adding a platform to capitalize on increased demand for regulated medical waste services. WM is also investing $3 billion through next year on 39 new or upgraded high-tech recycling facilities and 20 new renewable natural gas (RNG) facilities at its landfills. Expanding these businesses generates incremental earnings and opens new growth pathways for the company.

A long-term winner with a bright future

WM's simple business model has delivered stellar results for shareholders over the years. The company has produced a nearly 400% total return over the past decade (17.4% annualized). That has beaten the S&P 500, which is up over 290% during that period (14.6% annualized).

The company is in a strong position to continue producing robust returns. WM's core collections and disposal business should continue to deliver steady revenue and earnings growth. It should benefit from inflation-driven price increases, volume growth as it collects more garbage, and its cost-management initiatives. Additionally, the company has a rock-solid, A-rated balance sheet, giving it ample financial flexibility to continue making acquisitions. While it has the largest share of the $125 billion U.S. and Canadian waste and recycling industry market at $22.1 billion in revenue, it's highly fragmented, as small, private waste management companies control half the market. That provides WM with lots of opportunities to continue making smaller tuck-in acquisitions to grow its collection and disposal business even faster.

Meanwhile, the company's growing investments in recycling, renewable energy, and healthcare solutions will further enhance its ability to grow shareholder value. The company still has 10 new or automated recycling facilities under construction and 12 new RNG plants to complete as part of its $3 billion in sustainability investments planned through next year. Once complete, this investment will generate a combined $600 million in incremental annual free cash flow for the company by 2027. The company should have ample opportunities to continue investing in sustainability initiatives in the future. For example, WM sees lots of potential to recycle food waste and has ample opportunities to build additional RNG plants at its landfills.

Additionally, the Stericycle deal provided a foundational platform to capitalize on the growing need for medical waste solutions. Aging populations, increasing chronic health conditions, and rising hospital occupancy levels should drive faster volume growth for this business compared to its core solid waste business.

These catalysts drive the company's forecast that it can grow its revenue to around $29 billion by 2027, a more than 9% compound annual growth rate. That positions it to grow its annual free cash flow to more than $4 billion, a nearly 8% compound annual rate. This growing excess free cash will enable WM to continue investing in growth-related sustainability projects while returning more cash to investors through share repurchases and a growing dividend. WM has increased its dividend for 22 straight years, including by 10% late last year.

A great long-term investment

WM has a knack for turning trash into treasure for its shareholders. The leading environmental service provider has grown its revenue and earnings at strong rates, enabling it to deliver robust total returns. It's in an excellent position to continue growing shareholder value in the future, making it look like an ideal long-term holding.

Matt DiLallo has positions in WM. The Motley Fool recommends WM. The Motley Fool has a disclosure policy.