Tuesday, April 30, 2013

Recent Sell

Last Friday I sold out of my small position in Waste Management (WM).  It's a shame to see them leave my portfolio since they were one of the first stocks that I bought but I can't justify holding a position for sentimental reasons if it's not performing how I'd like.  I wasn't thrilled with what I heard in the conference call and the last 2 dividend increases have been pretty paltry with 4.41% and 2.82% increases.  I'd be fine if that was a high yielder between 6-8% but with a current yield of   3.60% that just won't cut it.  Plus the P/E ratio is 23+ currently which seems way high for a slower grower like WM.
As I mentioned, this was a small position.  I purchased 10 shares of WM in August 2011 for $29.94 per share with a cost basis after commission of $30.74.  That was one issue with buying such a small position the commission added almost a $1 to my cost basis, not very smart.  I had reinvested 5 dividend payouts over the life of the position which added an extra 0.536 shares and received two payouts in cash for a total of $7.25.  All in all my total return before taxes for the WM holding was 37.78% good for a 20.8% annualized rate.

I still like WM and wouldn't mind picking shares back up in the future if the dividend growth begins to accelerate.  For now though I figured it was time to part ways.  I really like what the business model because it's essentially a local monopoly where they have landfills because of the regulations and permits required for new landfills.  No one wants to have one in their community unless they are hurting for revenue.  There is a WM landfill not too far from my house and when you drive by it in the heat of the summer the stench is rather awful.

14 comments:

  1. I think you made a good decision for the various reasons you mentioned. The garbage business has some attractive features (from an investing standpoint), but I agree that WM is not an attractive investment at the moment.

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    1. DGM,

      I had been trying to pick what price I felt comfortable selling at. I almost waited until $41 just to see if it'd get there and of course a day or two after selling it did hit that. Oh well. I really like WM but I don't think there's anyway WM can grow enough to justify it's current valuation. The current yield was still pretty solid but I'll take a faster growing dividend with a slightly lower yield for now. I was actually quite shocked to see the 23+ PE ratio.

      Thanks for stopping by!

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  2. I will admit its always hard to sell some of the first stocks you've ever owned. Luckily for me most of my stock positions were losers and were no brainers to dump. ;-)

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    1. Marvin,

      Trust me, I had my share of those. I'll take the profit and run for now but I'll welcome them back to the portfolio if the yield climbs over 4.00% again and the DG picks up. We just have to remember that the companies were purchased for a reason and that sentimental reasons wasn't one of them.

      Thanks for stopping by!

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  3. Pursuit,

    Solid move. I've never really liked WM because of the fundamentals, but should have bought anyway. It's had a hell of a run. But if I were to own it I would definitely be selling it. That's a premium valuation for a stock that doesn't really deserve it. It's basically a quasi-utility and behaves as such. The low entry yield and low DGR is rather unattractive if you use the combined numbers as a general proxy for total return. Better companies abound!

    It's a shame because the business model (trash collection) is easy to understand and WM is the biggest in an industry where scale is important. I'd love to own the company, but it's a case where I like the business but not the stock.

    Best wishes!

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    1. DM,

      I was completely shocked when I saw the 20+ PE for WM. That just doesn't make sense to me even in really hard times because the growth just won't be there to justify current prices. I'm sure I missed some of the upside but a profit is a profit. And it's even better when you can get out of a position that you feel is well overvalued.

      I love the business model and the barrier to entry is high. When they are the clear cut top dog with the number of landfills they own it's pretty intriguing. I wouldn't be opposed to getting back in with a big pullback to somewhere around $30 again but I'm not holding my breath for that one.

      Thanks for stopping by!

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  4. Sounds like a wise decision. I toyed with the idea purchasing both WM and RSG in the past, wish I had! Even though the dividend growth didn't cooperate with your plans, you made a nice profit. Not too much to complain about! I'd like to start a position in one of the trash collectors at some point. That point in time is not now however. Same with similar industries (utilities). They all seem over valued.

    Have you noticed when interest rates plunge, utilities and trash collectors often see price increases? I semi keep tabs on treasuries .Current interest rates are some of the lowest I've seen since I started paying attention to it. I recently graphed the 10-yr treasury rate vs. SO and a few similar businesses. It seems there is some correlation there.

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    1. CI,

      I wish I had picked up more when I made my first purchase but I just didn't have the capital available. It was a great buy at the time at sub-$30. I wasn't expecting 10%+ DG but I was hoping for around 6% and they didn't touch that with either one of the increases while I owned them, so it was time to let them go.

      Since utilities are essentially local monopolies they trade more as bonds. Interest rates drop so the yields from utilities look really attractive and income investors tend to flock that way. I would like to get a bit more exposure to the utilities in the future to juice the yield of the portfolio a bit with some higher-yielding/slow-growing payers but as you mention now is not the time.

      Thanks for stopping by!

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  5. You made a wise choice. wm faces increased competition and an outdated waste-to-energy model. They're like a buggy whip manufacturer circa 1900.
    Check their statements regarding Wheelabrator and find the truth at http://www.truthaboutwm.co
    Do your homework and you will see this dog's days are over.

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  6. Sorry, that address is www.truthaboutwm.com

    And to the above, they only have a monopoly until better technology comes along...

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    1. WM is still pretty much a monopoly in their areas. They might not service the whole trash collection area but when you own the landfill you're still getting a piece of the pie, albeit less. The waste-to-energy model might be outdated but they still own the landfills which are hard to get permits for new ones. This allows them more time to get things situated and they don't necessarily have to act as quickly as possible. I really like the transition they're making to nat gas powered trucks and the w-e model is smart. I'll get back in if it dips to around $30 or the DG returns, but I don't expect either of those to be coming anytime soon.

      Thanks for stopping by!

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  7. PIP,

    I am having a tough time deciding when to cash out and your post confused me a bit. You say you feel like the company will continue to grow, the moat on the business is high...why get out? It isn't like a 23 P/E is that astronomical? Is it because you feel like the stock is going to be flat for the years to come? Even if it is flat why care if it is paying out a pretty healthy 3.6% yield.

    Not questioning whether this is a right or wrong move (who the hell am I to make that statement) just really trying to understand the move a bit more so I can maybe apply it to my world.

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    1. Evan,

      I didn't think it was an absolute must sell at the current levels but a big driver for the reason I sold was due to the low dividend growth. 4.4% and then 2.82% isn't what I'm looking for currently, especially if the yield is only 3.6%. I feel I can do better since I still have a ways to go before trying to live off my dividend income. I think WM will continue to grow but it won't be much higher than the rate of inflation and there's better opportunities than that, at least that's my thinking. I don't think WM will grow anywhere close enough to justify a 23 P/E so I expect it to suffer P/E compression going forward. It's essentially a utility and I wouldn't be buying a utility with a 23 P/E ratio. Of course it's continued higher since I sold out so what do I know. The moat is wonderful because there's a high barrier to entry, who the hell wants a landfill in their neighborhood? And they have a ridiculous % of the landfill permits, I can't remember off the top of my head but I'm pretty sure it's well over 50%.

      I don't think we'll be seeing great DG going forward, at least for the next few years. They're having some cash flow issues that I don't really like and feel will continue the small dividend increases.

      Just my thoughts, but I'm glad you asked. It's always good to be questioned on things because if you can't really explain your reasoning or even have a good reason then there's a good chance that you might have been a bit rash in your decision.

      Thanks for stopping by!

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    2. Evan,

      Another reason I sold was because of the position size. If I had a full 100 share position I would have been selling calls to either collect the premium or have the shares called away. A 10 share position just didn't let me do that, unfortunately.

      That will be my typical exit strategy for shares that are getting overvalued. I'll look to sell calls where I'll with either way.

      Thanks for stopping by!

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