Waste Management makes money by hauling trash. But we expect more than half of the profit increase to come from the unexpected.

with waste management (WM 0.34%) Most people reading this company, which operates the largest landfill network in the U.S. and Canada, have seen one of its trucks go by at some point.

The company generates most of its revenue through trash collection. By the first three quarters of 2023, waste collection from commercial, industrial and residential properties accounted for 68% of revenue.

In some cases, because there is no landfill nearby, waste management can take the waste to a transfer site, process it, and transport it to the landfill more efficiently. The company owned or operated 337 transfer stations as of the end of 2022, a figure that will be updated when it reports fourth quarter 2023 results.

Waste Management owned or operated 259 sites in its landfill network at the end of 2022. All of these sites require appropriate permits from various government agencies, which may be difficult to obtain initially. However, once acquired, it can become a competitive advantage. It’s difficult for a competitor to come in and steal your business.

As expected, Waste Management derives most of its business from revenue generated through waste collection, landfill and transfer station operations. But surprisingly, the company’s landfills have more value than meets the eye. And management predicts that more than half of its profit growth by 2026 will come from extracting this hidden value.

What exactly is that worth? read.

Project Surprising Benefits of Waste Management

The company is hauling tons of waste to landfills, where it all stays there. Well, not really. only Sit down – it also disintegrates. And as a result of decomposition, waste releases what is called landfill gas (LFG).

LFG can be harvested to generate electricity, and that’s exactly what the company has been doing. However, it can also be refined into renewable natural gas (RNG) to power vehicles or sold to third parties. This is the company’s top priority.

Waste Management built five facilities from 2015 to 2022 to convert LFG to RNG. And 20 more are scheduled to be built by 2026. This results in high capital expenditure for the company. The total bill is expected to be approximately $1.2 billion. However, the results are expected to be significant. In fact, Waste Management believes the RNG facility will generate $450 million in annual free cash flow after 2026.

Let’s put those numbers into perspective. If not for all of its current capital spending, Waste Management would generate about $2.5 billion in annual free cash flow. However, management believes it could add $580 million to free cash flow if its current investments begin to pay off. Of this, $450 million will come from RNG investment.

That means about 78% of incremental free cash flow comes from converting landfill gas to RNG, which is something you might not expect at all.

Why Waste Management Is a Good Stock to Buy

Over the years, Waste Management has continued to grow its profits, giving it more options for creating shareholder value. Two of the most frequently made decisions are share buybacks and dividend payments. The chart below shows the long-term trend.

WM Average Diluted Shares (Quarterly), YCharts data.

Last December, the company announced that it had increased its dividend for the 21st consecutive year, putting it in elite territory.

As already mentioned, Waste Management’s core business is strong and the company is competitive. And there is a viable path to profit growth as it makes better use of what it already has at its disposal: landfill gas. And that could boost shareholder value, making it a great stock to buy and hold today.