Sustainable Solutions: How to Invest in Canada’s Waste Management Leaders

There are plenty of economic concerns looming over investors and consumers right now. It may be fair to say that the market isn’t in a strong position, especially since valuations are rising while concerns about inflation and a recession persist. 

With these risks in mind, investors should seek some protection in stocks that tend to perform well regardless of the economic cycle. Here’s a closer look at what’s happening in the economy and why Canada’s top waste management and garbage disposal companies could be the best place to hide. 

Economic outlook

The Bank of Canada raised interest rates by another 0.25% this week. This rate hike was a surprise, since most economists believed the central bank’s fight against inflation was going well and rates wouldn’t need to go much higher. But now that rates and inflation look much more persistent, investors need to seek out ways to generate better income or protect their capital. 

In Canada, one of the safest sectors of the economy is waste management. This sector has little competition and is highly fragmented. That means large, publicly listed firms can swoop in and grow through acquisitions. 

Meanwhile, the sector’s earnings potential is relatively stable.  Waste management companies have fixed contracts with municipalities and corporate landlords. These services are essential, so a recession doesn’t necessarily mean revenue or profits will drop. 

This is why Canadian investors can add some exposure to the waste disposal sector during a volatile market cycle. Here are the top two waste management companies you should watch in 2023. 

GFL 

GFL Environmental (TSX: GFL) is a hidden gem. The company has rapidly grown into one of the largest environmental services firms in the country. It now offers a range of services, from waste management, infrastructure, to soil remediation. All these are essential services that are disconnected from the economic cycle. 

The stock is up 26.9% year to date, which is better than the S&P/TSX Composite Index over the same period. The TSX Index is up only 2.5% since January 2023. 

In 2023, the company expects to deliver $7.5 to $7.6 billion in total revenue. It also expects approximately $700 million in adjusted free cash flow (FCF). Based on these estimates, GFL stock is currently trading at a price-to-revenue ratio of 2.4 and a price-to-FCF ratio of 26.1. That’s a fair price for a robust blue chip stock. 

Waste Connections

Waste Connections (TSX: WCN) is another blue chip waste management company that should be on your radar. The stock is trading at a 52-week high but its price-to-earnings ratio is still reasonable at 41. 

Waste Connections has also seen robust growth in recent years. Revenue is up 8% compounded over the past five years, which is effectively 46.5% higher over this period. The company has also delivered double-digit dividend growth rates over this period, with the most recent dividend hike coming in at 10.9%. Keep an eye on this rock-solid stock.