Republic Services: A Future Dividend Champion, Currently Overvalued

Company Overview - Republic Services Inc. (NYSE:RSG) is a leading company in garbage collection and waste disposal, outperforming the S&P 500 ETF (SPY) by 22.7% to 14.4% in 2024 and 36.7% to 21.3% over the past year [2] - The company is known for its consistent and predictable earnings, strong pricing power, and a strategy of serial acquisitions to expand its operations [2] Financial Performance - Revenue has shown significant growth, with an increase of over 11% from 2020 to 2021, nearly 20% from 2021 to 2022 (partly due to the acquisition of US Ecology), and another almost 11% increase in 2023 [3] - The company has achieved a compound annual growth rate of nearly 10% in revenue over the past five years, with FY24 revenue projected between $16.075 billion and $16.125 billion, reflecting a 7.5% increase from 2023 [3] Earnings Per Share (EPS) - Earnings per share have been on the rise since 2019, with a growth rate exceeding 13%, peaking at a 33% increase in 2021 [5] - Management projects FY24 EPS to be in the range of $6.10 to $6.15, indicating an increase of about 11.5% [7] Operating Margin - The operating margin has remained steady, fluctuating between 16.83% and just above 18.5% over the past five years, demonstrating the company's ability to control variable costs [9] Dividend Policy - Republic Services has paid dividends for over 20 years and is on track to achieve "Dividend Champion" status, currently yielding about 1.15% [11] - The company has maintained consistent dividend growth, with 3-, 5-, and 10-year growth rates all above 7%, and a reduction in payout ratio from nearly 50% in 2019 to about 35% recently [11] Free Cash Flow - Free cash flow has grown significantly, with a rate of about 14% since 2021, and management expects adjusted free cash flow for 2024 to be between $2.15 billion and $2.17 billion, a potential increase of about 9% [12] Valuation - Current valuation methods suggest that RSG is overvalued, with a price to earnings ratio fluctuating from a low near 25 to a high just above 34, and a current price approximately 15% above the estimated fair value based on EPS guidance [14][15]