However, even more people - 2.6 billion, according to the World Water Council - live in areas without adequate sanitation, making waste management an equally pressing global concern.
In fact, any hope that we have of resolving the mounting global water shortage will depend heavily on both cleaning up existing water sources and recycling the wastewater we currently produce - two jobs that will translate into big opportunity for investors in companies that focus on pollution control.
Of course, the bulk of global waste-management activity involves not water, but trash - with the clean-up of toxic materials thrown in for good measure.
What Is Waste Management?
To be precise, the industry usually referred to as "waste management" is defined as the "monitoring of, collection, transport, processing, recycling or disposal of waste materials." The waste itself can include "solid, liquid, gaseous or radioactive substances," and the primary purpose of the clean-up is to reduce the effect of that waste on human health, animal species, the natural environment or aesthetics - i.e., the general quality of civilized life.
In pursuing those goals, waste management efforts are divided into seven primary sectors:
Integrated waste management - This is a broad approach to dealing with municipal trash, also known as Municipal Solid Waste (MSW). It involves the collection and separation of refuse so that non-organic materials can be recycled or reused and organic materials can be composted or processed to produce fuel for energy generation.
Landfill operations - This is the world's most common means of waste disposal, with methods ranging from sophisticated layering and coverage techniques in more advanced Western nations to merely dumping trash in holes or natural ravines in rural or developing regions.
Incineration - The second most common means of waste disposal, this can range from simple open burning in less-developed regions to large and highly engineered facilities in advanced areas that practice "thermal treatment," a process for converting incinerated waste into reusable heat, steam, gas and ash. Incineration is most actively used in densely populated nations like Japan, where the limited amount of land makes landfills impractical.
Water purification and treatment - This practice focuses on the purifying, recycling and reclaiming of water, as well as the treatment of sewage and other liquid wastes and pollutants that pose threats to a region's water supplies.
Recycling programs - Typically operating in tandem with advanced landfill or incineration systems, these programs collect, separate and process various metals - e.g., copper, aluminum, tin, steel cans - and plastics for reuse. A recent addition to this segment is the recycling of so-called "e-waste" - metals, chemicals and other elements retrieved from discarded computers, TVs and other electronics.
Biological reprocessing - This industry sector deals with biological wastes - plant material, yard wastes, food scraps, paper products, etc. - using composting and natural digestion processes that speed up their decomposition so they can be recycled as mulch or fertilizer for agricultural or urban landscaping work.
Energy recovery - This segment uses many of the same techniques employed in landfills, incineration and biological reprocessing, but the end goal is the capture and utilization of heat or waste gas (methane) to generate electricity or provide residential or industrial heating. Some facilities also process trash into products that can be directly used as fuel. One example is a new technology that can convert waste plastics back into a synthetic oil that can be used as fuel for trucks or jet engines. Another can be found in Haiti, which has lost 97% of its forests and has few natural fuel resources. Plants there are converting trash into cooking briquettes that can be used instead of charcoal.
An eighth segment of the industry, usually referred to as "sustainability," involves working with cities and corporations to reduce the amount of waste they generate by rethinking both operating processes and the types and amounts of material used in manufacturing, product containers and packaging.
Although separate from mainstream waste management, dealing with hazardous wastes - everything from chemical spills and petroleum products to medical and nuclear wastes - is also a possible target for investors in this sector.
The Pros and Cons of Waste Management
Waste management is big business.
The Environmental Protection Agency (EPA) estimates that disposing of MSW costs roughly $100 per ton, which would equate an annual cost of around $23.8 billion in the United States alone.
Of course, the bulk of that expenditure is internal since most municipalities have their own trash services and disposal sites. However, a large number do contract with private companies, some publicly traded, for services, and they all have to pay for equipment and technologies, virtually all of which come from the private sector.
Most of the specialized waste disposal activity - whether it involves chemicals, radioactive wastes or toxic emergencies - is also handled privately.
Waste management isn't a cyclical industry, either.
Every day, people the world over consume resources and generate trash that must be collected and processed. Thus, trash companies make good long-term holdings for your portfolio, resistant to swings in the economy that might impact stocks in other sectors.
However, a less attractive attribute of the industry is that growth potential is limited.
The vast majority of waste-management companies have government entities, typically municipalities, as their primary customers. Those firms typically have monopolies in a given area, but their contracts often have to be negotiated against a backdrop of tight local budgets.
As a result, there are few means for increasing profit margins, and growth prospects are typically limited to increasing populations or the annexation of additional land into the cities. Opportunity for expansion into new markets is also limited as most communities already have trash services, not to mention the fact that expanding requires considerable new investment in equipment, people and added facilities for processing the waste.
For larger companies that deal with multiple cities or private customers, there's also the problem of inconsistent regulations. While the U.S. government sets general environmental policy, there are really no uniform national standards for waste disposal or processing infrastructure.
The environmental group Zero Waste America describes waste-handling policy in the United States - and most other nations - as "the free market at its worst, with the focus on making money, not sense" in terms of effective federal laws to minimize waste, maximize recycling and protect the environment and public health. Larger waste companies may have to follow as many different sets of working standards as they have municipal clients.
Logistics can also be a problem - one with increased costs attached. Since most citizens don't want landfills, incinerators, recycling yards or other trash facilities right next door - the "Not in my back yard," or NIMBY, sentiment - waste companies often have to site landfills a long distance from the areas they serve, which can translate into sharply higher fuel costs when oil prices rise as they have lately. Some communities even refuse to allow waste companies to build landfills, meaning they have to haul their trash to landfills owned by other cities or companies and pay so-called "tipping fees" to dump there.
Seven Waste Management Profit Plays
Overall, then, the probability of hitting a home run with an investment in the waste-management sector is small - but if you're looking for stocks that can provide a consistent string of singles and doubles, there are several possibilities you may want to consider.
Two companies at the top of the industry food chain are:
Waste Management Inc. (NYSE: WM), recent price $36.90 - Founded in 1894, WM is North America's largest waste handler, serving industrial, commercial, municipal and residential markets. It collects 115 million tons of waste per year and owns 268 landfills around the country. It's also the country's largest provider of recycling services, generating more than 20% of its revenue from that sector. The stock has been a steady performer, generally trading between $30 and $40 in recent years, though it did slump to $23.60 in the 2008-2009 market sell-off. More importantly, the company has a steady record of earnings growth (to $1.98 per share in 2010) and has raised its dividend in each of the past four years. It currently pays out $1.26 a share, or 3.42%.
Republic Services Inc. (NYSE: RSG), recent price $28.97 - Republic provides a bit more diversification than WM, handling non-hazardous solid wastes for commercial, industrial, municipal and residential customers in 40 states and Puerto Rico. The company owns or operates 223 transfer stations, 192 solid-waste landfills and 78 recycling facilities. It also operates 74 landfill gas and renewable-energy projects. The stock has recovered nicely from a March 2009 low of $16.47, but still has a long way to go to reach its 2008 high near $35. The company had diluted earnings per share of $1.32 in 2010 and raised its dividend to 78 cents, up from 55 cents in 2007, providing a yield of 2.68%.
For investors who want a slightly better shot at hitting a home run while still enjoying the stability of the waste sector, the best approach is to look at some of the more specialized companies.
Two good prospects are:
Covanta Holding Corp. (NYSE: CVA), recent price $16.78 - CVA develops and operates infrastructure for the conversion of waste to energy (WtE) and also operates other waste disposal and renewable energy businesses in North America, South America, Europe and Asia. The company has seen earnings fall as a result of the recession, but still remains profitable, netting 20 cents a share in 2010, and the stock is well off its 2008 high of $29.96. CVA doesn't pay a dividend.
U.S. Ecology Inc. (Nasdaq: ECOL), recent price $16.32 - Formerly known as American Ecology Corp., ECOL and its subsidiaries provide industrial waste-management services to government and commercial clients such as refineries, chemical plants, manufacturers, electric utilities, steel mills, medical and academic institutions, dealing with disposal of radioactive, hazardous, polychlorinated biphenyls (PCBs) and non-hazardous industrial waste materials. Earnings for 2009 came in at 75 cents per share, down from $1.18 in 2008, which explains why the stock remains well off its pre-recession high of $32.82. However, earnings rose in each of the first three quarters of 2010 and are expected to show a modest increase for the full year. The dividend, which has been raised in each of the past three years, stands at 72 cents, good for a yield of 4.30%.
If you're looking for a little more international exposure and want to go where the waste problem may be the greatest in the present global economy, check out China.
China Industrial Waste Management Inc. (PINK: CIWT), recent price $1.68 - CIWT, through its subsidiaries, engages in the collection, treatment, disposal and recycling of industrial wastes, municipal sludge and sewage treatment, and environmental protection engineering services for 770 customers in Dalian, China, and surrounding areas in Liaoning Province. The company's per-share earnings dropped from 35 cents in 2008 to 12 cents in 2009, but are expected to rebound to 24 or 25 cents for 2010. The company pays no dividend and the stock, which traded above $5.00 in 2008, is very thinly traded on the U.S. markets, so be sure to use a strict limit order when buying.
When it comes to pure plays, fund investors looking for access to the waste-management sector are generally out of luck, though there are a few exchange-traded funds that invest around the periphery of the industry. Two worth looking at are:
Market Vectors Environmental Services ETF (NYSE: EVX), recent price $51.47 - EVX tracks the NYSE Environmental Services Index, a modified equal dollar-weighted index consisting of publicly traded companies that are involved in the management, removal and storage of consumer waste and industrial byproducts and related environmental services. This passively managed fund in 2010 boasted strong earnings, a comparatively low expense ratio (0.30%) and paid a 38-cent dividend, but the shares are thinly traded, so use limit orders.
iShares S&P Global Nuclear Energy (NYSE: NUCL), recent price $45.61 - This fund tracks the S&P Global Nuclear Energy Index, which follows approximately 24 publicly traded companies in nuclear energy-related businesses, including nuclear waste and clean-up, from developed markets around the world. The fund shares bottomed around $35 in July 2010 and have risen steadily since, though they did pull back with the market in late February. The fund has no regular dividend but declared one-time payments of 50 and 87 cents during the past year.
As noted, opportunities for major wins in this sector are limited - but with a little patience, you could wind up fairly effortlessly converting the world's trash into your growing personal treasure.