Here’s a Breath of Fresh Air in a Stale Market

Waste Connections Inc. (TSX:WCN)(NYSE:WCN) stock can be expected to continue to outperform, as the company continues to beat expectations, raise its dividend, and churn out massive amounts of cash flow.

| More on:
best, thumbs up

Waste Connections (TSX:WCN)(NYSE:WCN) continues its ascent in a market that continues its relentless descent.

The performance of the TSX Composite Index since January 2018 is negative 10%, and there is no doubt that the downward momentum is accelerating and the risks are mounting.

But in this increasingly shaky and uncertain market, we can turn to companies like Waste Connections to keep us above water.

Up 16% year to date and only 4.5% lower than its summer highs, the stock has outperformed the market very nicely, and it has been a breath of fresh air amid many plunging stocks.

Late last week, we got the news that broker Goldman Sachs upgraded the stock to a buy, citing its defensive qualities and earnings predictability as reasons to buy.

I agree.

Here are the four main reasons to own this stock for 2019 and beyond.

Dividend growth

With a 24% dividend-growth rate in 2016, a 22% dividend increase in 2017, an expected 16% dividend-growth rate in 2018, and a doubling of the share price since January 2016, Waste Connections stock has given investors the best of both worlds: income and capital appreciation.

Continuing to beat expectations

The company has handily beat EPS expectations in the last few years, and 2018 is no different.

In the first nine months of 2018, EPS came in at $1.90 versus expectations of $1.85.

And although the valuation on this stock is not cheap, trading at almost 30 times this year’s expected earnings, the fact that the company generates ample cash flow, consistently beats expectations, and operates in a highly fragmented market that is ripe for consolidation all serve to justify this valuation, in my mind.

Free cash flow machine

Revenue increased 6.2% in the latest quarter, the third quarter of 2018, EBITDA increased 6%, and free cash flow as a percentage of revenue was almost 16%.

The free cash flow margin of 16% is a clear sign that the financial health of the company is excellent, as the more that the company can transform its revenue into cash, the better.

In fact, the company has been achieving an impressive free cash flow margin for years now. In 2015 and 2016, the ratio was just above 16%, and in 2017 it was just over 15%.

Balance sheet improvement

With the acquisition of Progressive Waste Solutions, Waste Connections assumed plenty of debt and, as of December 2016, had a debt/EBITDA ratio of three times.

By December 2017, this had already come down to 2.7 times, and as of the latest quarter, the debt/EBITDA ratio improved even more and stands at 2.2 times.

This debt level still does not worry me because the company’s cash flow generation is strong.

Waste Connections remains in good shape to capitalize on the many acquisition opportunities that exist, and this, along with pricing strength, will help drive continued growth.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Karen Thomas has no position in any of the stocks mentioned.

More on Dividend Stocks

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

think thought consider
Dividend Stocks

Down 10.88%: Is ATD Stock a Good Buy After Earnings?

Alimentation Couche-Tard (TSX:ATD) stock might not be the easy buy-case it once was. Here’s a look at what happened.

Read more »

money cash dividends
Dividend Stocks

TFSA Dividend Stocks: Earn $1,200/Year Tax-Free

Canadian stocks like Fortis are a must-have in your portfolio to earn tax-free yields for decades.

Read more »

sale discount best price
Dividend Stocks

1 Dividend Stock Down 11 Percent to Buy Right Now

Do you want a great dividend stock down 11% that can provide years of growth potential? Here's one heavily discounted…

Read more »

Growth from coins
Dividend Stocks

1 Grade A Dividend Stock Down 11% to Buy and Hold Forever 

If you're looking for the right dividend stock at the right price, you're going to want to consider this insurance…

Read more »

Target. Stand out from the crowd
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

Are you looking for dividend stocks to buy right now? Here are two top picks!

Read more »

edit Taxes CRA
Dividend Stocks

Tax Time: How to Keep More of Your Money

Nearly everyone hates paying taxes, although Canadians can lessen the financial pain with the right tax strategies.

Read more »