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The Waste Management Dividend Play


The lucrative trash hauling business makes its primetime debut.

When the final numbers are released, it's likely that last night's Super Bowl will turn out to be the most-watched in 23 years.

Unless you changed channels -- or were too full of guacamole and beer to stay awake -- you may have caught the first episode of the new CBS (CBS) reality show Undercover Boss.

In the season premiere, Larry O'Donnell, president and COO of Waste Management (WM), the largest garbage collection and disposal company in the United States, labored alongside everyday employees who had no idea who he was until the end of the program.

The private carting industry is highly lucrative, especially for Waste Management, with $8.8 billion in sales during the first nine months of 2009. The company's strong cash flow (though it carries a debt load of $8.2 billion) allows it to pay a $1.16 per-share dividend, up from $0.75 in 2004, according to Morningstar analyst Bradley Meeks.

Meeks recently raised his fair value estimate for Waste Management shares to $34. Wall Street analysts expect the company to report earnings of $0.48 per share next week.

Waste Management's dividend payments make the firm stand apart from other carting companies, like Republic Services (RSG), Waste Connections (WCN), and Casella Waste Systems (CWST).

Houston money manager Ryan Krueger is on the hunt for dividends this year. "You can pay yourself now or later -- and I'll take now," he said. "With the 15% tax rate on dividends set to expire this year, it's a buy for me right now, as next year dividends will be taxed as regular income."

The big public trash haulers now operate freely across the country and overseas. But there was one market not one of them wanted to touch in the past: New York City.

In 1956, New York City passed a law requiring private businesses to hire private carting companies to remove their garbage, freeing the city's sanitation department from the task. Almost immediately, the Genovese, Lucchese, Gambino, Bonanno, and Colombo crime families seized upon the opportunity to create their own carting firms, carving up territory in the five boroughs of New York and running their areas without competition. According to the 2004 book Takedown: The Fall of the Last Mafia Empire by Rick Cowan and Douglas Century, carting became the mob's "most lucrative enterprise since Prohibition".

It was then that Mayor Rudolph Giuliani created the Trade Waste Commission. The commission's mandate was to break the Mafia's stranglehold on the industry, which then consisted of more than 600 separate companies collecting trash from 250,000 businesses in New York City alone and added an extra 40% to each of their trash-removal costs -- the highest in the country.

This earned the Five Families about $1.5 billion annually.

During the first year, the commission shut down nearly one-third of the Mafia-run companies, and allowed national concerns -- such as Waste Management -- to do business in the large New York City market for the first time.

This not only benefited Waste Management and its competitors, it also lowered the prices companies had to pay for trash removal, which had previously been roughly three times as high as those paid by businesses in Los Angeles and Chicago.

The New York Times reported that one office building in lower Manhattan saw its trash collection bill drop by $1 million a year.

Before the Mafia cartel was broken, the carting industry blamed the higher costs in New York City to "excessive labor and landfill dumping expenses."

For some reason, Waste Management and the other players in the sector never seemed to have this problem.

Weird, huh?
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