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Motley Fool: Garbage Greatness

Kristina Daly sends a plastic bag up a vacuum tube on the presort line at the Waste Management SMaRT Center southwest of Spokane in 2012. (Dan Pelle / The Spokesman-Review)
Kristina Daly sends a plastic bag up a vacuum tube on the presort line at the Waste Management SMaRT Center southwest of Spokane in 2012. (Dan Pelle / The Spokesman-Review)

Waste Management (NYSE: WM) owns a network of garbage-collection routes, waste-processing facilities and landfills that would be hard, if not impossible, to replicate. The business is based on long-term contracts to supply a service that is essentially a modern necessity. Economic ups and downs can have an impact on the company, but the need for trash disposal isn’t going away anytime soon.

It’s close to impossible for new companies to enter this heavily regulated industry, and the generally low-margin business benefits from economies of scale. As the nation’s largest trash hauler, Waste Management is in a position to keep anyone from encroaching on its turf for many years to come.

Along with its durable business, Waste Management also has a talented management team. Even though it’s in a relatively slow-growth industry, management has been hyperfocused on costs and has been increasing per-share profits via a hefty dose of share repurchases. As a result, this seemingly boring business is cranking out strong returns on equity on a regular basis. The company does carry a lot of debt, in part because of the capital-intensive nature of its business, but it also earns enough to manage it.

Waste Management’s dividend recently yielded about 2 percent, and its payout has been increased annually for 15 consecutive years. The stock is worth consideration as a long-term holding.

Ask the Fool

Q: Can you explain what a reverse takeover is? – W.B., online

A: The usual way a company goes public is via an initial public offering (IPO), which can be a lengthy and costly process. Some companies opt for a reverse takeover instead, which can be quicker and less expensive. It involves a privately held company buying a controlling stake in a company that’s listed on the stock market, in the process becoming a listed company itself. Smaller companies have merged with larger ones via reverse takeovers, too.

Some foreign companies have used reverse takeovers (occasionally referred to as reverse mergers or reverse IPOs) in order to get listed on U.S. markets, and some of those instances have involved fraud.

But reverse mergers have been executed by plenty of well-known names, such as Occidental Petroleum, Turner Broadcasting, Texas Instruments, Burger King, Jamba Juice and Warren Buffett’s Berkshire Hathaway. Even the New York Stock Exchange employed a reverse takeover in going public.

Q: What, exactly, is a “stock dividend”? – D.L., Philadelphia

A: Some public companies regularly pay out some of their excess cash to shareholders in the form of dividends. Not all dividends are paid in cash, though. Companies can choose to reward shareholders with additional shares (or fractions of shares) of stock.

Stock dividends may seem preferable to cash, but when a company increases its share count by issuing additional shares of stock, it’s diluting the value of existing shares. Imagine a pizza, where the more slices there are, the smaller each one is. More shares of a company leave each share with a smaller stake in the company. A company might favor stock dividends, though, because it gets to reward shareholders without sacrificing any cash.

My dumbest investment

In 1994, I invested $22,000 in some mutual funds via a full-service brokerage’s financial adviser. The adviser never mentioned that 4 percent would be taken out immediately as a load fee.

Three years later, I was down 40 percent. I asked to be switched into certain other funds, but they performed poorly, too. I finally gathered the courage to sell all my holdings in 1999. I ended up with about $25,500, giving me an average annual gain of only about 3 percent – during a period when many other funds were averaging 11 percent or more. – S.P., online

The Fool responds: The S&P 500 was actually roaring during those years, gaining 37.6 percent in 1995, 23 percent in 1996, 33.4 percent in 1997, 28.6 percent in 1998 and 21 percent in 1999. Those returns were far above its long-term average annual gain of close to 10 percent, and you could have enjoyed roughly those gains had you been invested in a simple, low-fee S&P 500 index fund.

Index funds outperform most managed stock mutual funds over long periods. You top that if you manage to find the relative few funds that beat the market, but that’s easier said than done.

You learned that it’s vital to examine fees before investing – especially loads that lop off a chunk of your investment. Remember, too, that any fund can have a bad year or two.

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