Waste Management is in the business of turning trash into cash, but its 2012 performance has left many investors disappointed. The stock is up 8.9% year to date but has lagged the S&P 500 and its peers. The company has a record of consistently raising its dividend and it a favorite of investors seeking yield. The company has just announced it will be raising its quarterly dividend by 2.8%, pushing the stock’s current yield to 4.2%. Yesterday we saw a trader make at bet that the stock will catch a bid in the first half of 2013 by buying 10,000 July 35 calls for $1.20 with the stock at 34.24. This trade will profit if WM is above 36.20, 5.7% higher, at July expiration.
What has held Waste Management back in 2012 is its year over year declines in net income. This has been the result of lower commodity prices. Waste Management has a stellar balance sheet though, which has allowed it to continue raising its dividend, while its sheer size has let it largely unaffected by smaller competitors entering the industry. Recently the company has said that in 2013 they expect operating cash flow to grow by double digits, which is the reason behind their dividend hike. Waste Management’s success in 2013 will be largely tied to both the strength of the US economy, as well as the company’s ability to reduce costs in order to increase margins. CFO James Fish is implementing a plan to flatten the management structure in order to unlock long term efficiencies, but this could lead to increased costs in the short term. Therefore, I am a buyer of calls with this trader in order to gain exposure to the stock’s potential upside. If economic growth stalls in the first half of next year or Waste Management’s restructuring is ineffective, risk will be limited to $1.20. But if Waste Management is able to increase its net income and provide upward guidance the stock could take off in 2013.