Image Shown: Shares of newsletter portfolio idea Republic Services Inc have put up strong performance so far year-to-date in the face of volatile capital markets.
By Callum Turcan
Garbage hauler Republic Services Inc (RSG) reported second quarter 2022 earnings that beat both consensus top- and bottom-line estimates. The firm’s strong performance during the first half of this year gave management the confidence to boost Republic Services’ full-year guidance during its latest earnings update. We are huge fans of Republic Services’ stellar cash flow generating abilities, ample pricing power, and the “annuity-like” revenue streams it generates by offering essential services (various waste management services including collection, disposal, and more are required to maintain a healthy and well-functioning society).
In May 2022, Republic Services closed its ~$2.2 billion acquisition of U.S. Ecology, and we are big fans of the deal. The acquisition is expected to unlock roughly $40 million in cost saving synergies within the first three years of closing while also generating around $75-$100 million in cross-selling revenue synergies. Furthermore, Republic Services added nearly irreplaceable waste service management assets to its portfolio, bolstering its “economic moat” as it would be quite difficult to build new waste disposal assets in the U.S. given opposition from NIMBYs, government agencies on the local, state, and federal level, politicians, political groups, and other entities.
Earnings and Guidance Update
Republic Services’ GAAP revenues rose 21% year-over-year in the second quarter of 2022 to reach $3.4 billion. That included 11% organic revenue growth on a year-over-year basis along with the boost provided by acquisitions. Its GAAP operating income rose by 14% year-over-year to reach $0.6 billion last quarter. Volume growth, pricing power, and effective cost control measures were key. Please note that its operating income performance was held back by acquisition-related expenses and should improve going forward.
Within its latest earnings press release, Republic Services noted that “second quarter revenue growth from average yield was 5.0 percent and volume increased revenue by 2.4 percent” while “second quarter core price increased revenue by 6.2 percent. Core price consisted of 7.8 percent in the open market and 3.5 percent in the restricted portion of the business.” For reference, “average yield is defined as revenue growth from the change in average price per unit of service, expressed as a percentage. Core price is defined as price increases to our customers and fees, excluding fuel recovery fees, net of price decreases to retain customers.” We are big fans of Republic Services’ pricing power.
Volume growth at its collection business came from small-container and large-container operations offsetting weakness at its residential volumes on a year-over-year basis last quarter. Its landfill business saw volume growth across municipal solid waste, construction and demolition waste, and special waste on a year-over-year basis in the second quarter of this year. Republic Services’ average yield benefited from strength across its collection and disposal businesses last quarter.
Republic Services posted $1.17 in diluted GAAP EPS in the second quarter, up 14% year-over-year. Its adjusted non-GAAP EPS rose 21% year-over-year to reach $1.32 last quarter. Looking ahead, Republic Services aims to generate $4.77-$4.80 in adjusted EPS this year, up from the $4.58-$4.65 forecast that Republic Services laid out in February 2022, though that guidance did not take the U.S. Ecology deal into account. At the midpoint of its current adjusted EPS guidance, that would represent 15% annual growth if realized.
The company also aims to generate $1.7-$1.725 billion in adjusted free cash flow this year, up from the $1.625-$1.675 billion guidance laid out in February 2022. If realized, its current adjusted free cash flow guidance would represent 13% annual growth at the midpoint. Republic Services generated $0.9 billion in free cash flow during the first half of 2022 and spent $0.3 billion covering its dividend obligations along with $0.2 billion buying back its stock.
However, we caution that the firm exited June 2022 with $11.8 billion in net debt on the books (exclusive of restricted cash and marketable securities, inclusive of short-term debt). Given its strong cash flow generating abilities and the highly visible nature of its future cash flows, we view that burden as manageable.
In July 2022, Republic Services raised its per share dividend by 8% sequentially and in August 2022, it further raised its per share dividend by another 8% on a sequential basis. Its current quarterly payout now sits at $0.495 per share or $1.98 per share on an annualized basis. Shares of RSG yield ~1.4% as of this writing.
Concluding Thoughts
Republic Services is one of the best dividend growth ideas out there, and it complies with rigorous ESG investing standards. In its second quarter earnings update, the firm noted that it “was named to 3BL Media’s 100 Best Corporate Citizens list for the third consecutive year. The ranking recognizes Republic’s ESG leadership in climate change, environment, and governance.”
Republic Services does a stellar job delivering on its goals. Back in July 2022, Republic Services mentioned that it was ahead of schedule as it concerns reaching its emissions reduction targets. In the press release, Republic Services noted that its “achievements include a 9% reduction in operational greenhouse gas emissions over the 2017 baseline year, ahead of pace to reach the Company’s interim target of a 10% reduction by 2025, and development of the nation’s first integrated plastics recycling facility.” We appreciate Republic Services’ efforts on this front.
There is a lot to like about Republic Services as the waste management firm is a tremendous free cash flow generator with ample pricing power. Management is incredibly shareholder friendly, as seen through recent per share dividend increases, and the company has been firing on all cylinders of late. We continue to like Republic Services in our newsletter portfolios. Our recently updated fair value estimate for RSG sits at $132 per share and the top end of our fair value estimate range sits at $158 per share of Republic Services.
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Callum Turcan owns shares of DIS, META, GOOG, VRTX, and XLE and is long call options on DIS, GOOG, META, MSFT, V, and VRTX and is long put options on RDFN and RKT. Honeywell International Inc (HON), Lockheed Martin Corporation (LMT), and Republic Services Inc (RSG) are all included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Republic Services is included in Valuentum’s simulated ESG Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.