Shares of Waste Management (NYSE: WM) soared 30% this past year, but looking forward this one looks like one to throw in the trash.
The company doesn’t come close to making my list of One Year Sizzling Stocks in 2014.
Heck, the company did not have to work very hard to earn investor respect this year. The company missed analyst estimates 3 out of the last 4 quarters and still the stock jumped.
What was the attraction?
The reason Waste Management did so well is obvious: Dividends.
The company pays a fat dividend yield of 3.3%. In a world of zero interest rates, dividend stocks like Waste Management attracted lots and lots of investors looking for income.
Those investors might have a rude awakening in 2014.
Interest rates in case you hadn’t noticed are going higher. The Federal Reserve recently initiated a taper of its huge bond buying program.
Even if the move was mostly symbolic, the writing is on the wall that the end of low interest rates is on the way.
What will that mean for dividend stock owners?
It means they won’t have to pay huge premiums for dividend paying stocks. Instead they can buy bonds again taking the risk appropriate for most income investors.
This one is obvious.
The Federal Reserve created risk taking in dividend stocks for the sake of improving overall economic conditions. Now with the economy growing at a solid clip, that risk taking will subside.
Dividend stocks like Waste Management have nowhere to go, but down.
The valuations are completely out of whack. At Waste Management analysts expect the company to grow profits by 9.5% in 2014. That is about what you would expect for a garbage company.
The problem is that shares trade for 18 times 2014 estimated earnings. A more reasonable multiple would be 12. At that multiple, Waste Management would have a price of $29 per share far below the current price of $44.
You see the problem.
Even if I am too punitive in my assessment of the situation, I wouldn’t waste my time in Waste Management.
At best this stock trades sideways or drifts lower. Considering economic growth might be stronger than expected and more typical risk reward ratios for stocks and bonds, I want to own growth stocks for my equity exposure and bonds for income.
Dividend stocks you can throw in the trash!
For stocks I would consider buying I use the PE Gap – stocks trading for low multiples of earnings and yet expected to grow profits at high rates.
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