Waste Connections Inc. (TSX:WCN) is an integrated solid waste services company. It provides waste collection, disposal, and recycling services in the U.S. and Canada. It also provides a lucrative, defensive, and rapidly growing business for investors who are looking for dividends and growth.
A growing yet defensive business
The waste services business is an essential one – it’s needed regardless of the economic environment. This makes it defensive. And not only is the business defensive, but it is also growing, which is a very nice combination. This growth has come through acquisitions as well as organically, and the company’s track record speaks for itself.
For example, revenue has grown 46.5% in the last five years. This is equivalent to a compound annual growth rate (CAGR) of almost 8%. But that’s not all. Waste Connections has also been improving its margins and cash flow generation. In fact, its operating margin increased from 16.9% five years ago to 17.2% in 2022. As for the company’s operating cash flow, well, that increased 43.3% in the same five years, or at a CAGR of 7.5%. As a result, Waste Connections’ stock price and dividend have soared.
We have a dividend superstar in WCN stock
Ultimately, this has all translated into strong returns for shareholders. Again, Waste Connections’ history speaks for itself. We can see consistent solid cash flow generation and dividend growth. For example, Waste Connections stock enjoyed a 24% dividend growth rate in 2016, 17% in 2017, 16% in 2018, 15.6% in 2019, 16% in 2020, 2.85% in 2021, and 16% in 2022.
I know, that went on and on. But I wanted to highlight the type of annual dividend increases that Waste Connections has been able to implement. It’s quite impressive. So, to sum it up nicely, the dividend has grown over 90% in the last five years, or at a CAGR of 13.5%.
And to top it all off, free cash flow as a percent of revenue is currently a phenomenal 15%. This shows the strength of this company and its strong potential for more dividend increases.
Latest results for Waste Connections stock (WCN)
The first quarter of 2023 showed that Waste Connections is still going strong despite certain challenging conditions. For example, a decline in resource recovery programs and really disruptive weather, especially on the west coast, hit results. Also, labour and inflationary pressures took their toll.
So, revenue increased 15.4% to $1.9 billion in Q1. But the challenges that I mentioned hit the bottom line, and thus EPS only increased a corresponding 10% to $0.77 per share.
Looking ahead
Waste Connections intends to continue with its strategy of growth via acquisitions in order to consolidate the still fragmented waste services market. At this time, management is encouraged by the acquisition opportunities and discussions that the company is having. So, we can probably expect another acquisition soon.
Importantly, Waste Connections is in the enviable position of having a very strong balance sheet. This enables the company to continue to make select acquisitions, thereby increasing its market share alongside revenue, earnings, and cash flow. This leaves me optimistic about Waste Connections’ (WCN) stock price outlook.
Lastly, management is citing good pricing visibility, which is positive for the business. Furthermore, the labour market is improving, and weather on the west coast has normalized. This leaves management optimistic about the future.
