Republic Services: A Closer Look at Stock Valuation and Dividend Potential
Republic Services Inc. (NYSE:RSG) is a leading company in the garbage collection and waste disposal industry. In 2024, RSG has been outperforming the S&P 500 ETF (SPY) by a significant margin, showcasing a healthy growth trajectory. With a strong track record of consistent earnings and pricing power, Republic Services typically trades at a premium compared to its peers. Additionally, the company has a history of strategic acquisitions to fuel its expansion. While Republic Services may appear slightly overvalued at present, opportunities for price weakness may present themselves in the future.
Financial Metrics: Revenue and Earnings Growth
Republic Services has demonstrated impressive revenue growth in recent years, with a notable increase of over 11% from 2020 to 2021 and nearly 20% from 2021 to 2022. The acquisition of US Ecology contributed significantly to this growth. In 2023, the company continued its upward trajectory with an almost 11% increase in revenue. Over the past five years, Republic Services has maintained a compound annual growth rate of almost 10%, driven by acquisitions, demand for its services, and strong pricing strategies. For FY24, management anticipates revenue to range between $16.075 and $16.125 billion, reflecting a 7.5% increase from the previous year.
Earnings per share (EPS) for Republic Services have also shown positive growth trends, with an increase of more than 13% since 2019. The highest growth rate was recorded in 2021 at 33%, following a slight decrease in EPS in 2020. Management projects 2024 EPS to fall within the range of $6.10 to $6.15, translating to an 11.5% increase. The company’s operating margin has remained relatively steady over the years, reflecting its ability to control variable costs and maintain profitability.
The Dividend: Consistency and Growth Potential
Republic Services has a longstanding history of paying dividends for over 20 years, positioning itself well to achieve “Dividend Champion” status in the near future. Currently yielding around 1.15%, slightly below the sector median, Republic Services has maintained consistent dividend growth rates over the years. With 3-, 5-, and 10-year growth rates all exceeding 7%, the company has earned an “A” rating for its dividend growth potential. Moreover, the payout ratio has decreased from nearly 50% in 2019 to approximately 35% in the most recent fiscal year, leaving room for future dividend increases. Republic Services’ ability to enhance its free cash flow significantly in recent years further supports its capacity to sustain and grow its dividend. The company’s adjusted free cash flow for 2024 is projected to range between $2.15 and $2.17 billion, potentially indicating a 9% increase.
When comparing Republic Services’ dividend yield to its competitors, the company falls within the middle range. While trailing behind Waste Management in yield, Republic Services has demonstrated stronger stock price appreciation over the past five years. Valuing the company based on its yield and price to earnings ratio, Republic Services appears to be currently overvalued, suggesting a potential wait for a better entry point for investors.
Risks and Final Thoughts
Despite operating in a relatively stable market, Republic Services faces risks associated with its growth strategy centered around acquisitions. While the company has been successful in acquiring businesses at fair prices, there is always a level of uncertainty regarding integration and premium payments. Continued diligence in acquisition practices is crucial to mitigate such risks. Additionally, fluctuations in commodity prices can impact the company’s revenue, albeit to a lesser extent.
Republic Services’ consistent revenue and earnings growth, coupled with a secure and growing dividend, position the company as an attractive investment option. While the stock may currently appear overvalued, monitoring for potential price corrections and entry points could present favorable opportunities for investors. Overall, Republic Services shows promise for continued success in the waste disposal industry, emphasizing the importance of strategic financial management and sustainable growth practices.
