Wall Street’s Next Big Play Is Garbage

The green push by the U.S. and state governments is turning trash into treasure and boosting the firms that handle America’s garbage.

Shares of the biggest players in the U.S. trash business, Waste Management and Republic Services, have traded at record highs since President Biden signed the climate, tax and healthcare bill in August. A recent decline notwithstanding, the stocks are popular picks on Wall Street to ride the sustainability boom higher.

“They’re sitting in this extraordinary position,” said Michael Hoffman, an analyst at investment bank Stifel. “Garbage will be on the forefront.”

Efforts to reduce greenhouse-gas emissions and to reuse materials are making it more profitable to mine landfills for energy and sift through refuse for the hot commodities of the green economy, such as detergent bottles and cardboard boxes.

WM and Republic are building plants to isolate methane from the fumes emitted by rotting garbage and pipe it into the natural-gas grid to be burned in power plants, furnaces and kitchens. They are also equipping recycling facilities with the latest in automation to better sort and process materials for the consumer-goods companies that are under pressure to keep their packaging out of landfills and the ocean.

Landfill owners are forecasting hundreds of millions of dollars in additional profit from rising demand for recycled materials and tax incentives for making energy from emissions that would otherwise seep into the atmosphere.

“We’re blessed to be sitting right in the middle of a megatrend,” Republic Chief Executive Jon Vander Ark said. “We used to think about getting 5% top-line growth a year; now we’re in double-digit top-line growth mode.”

Republic, which has 206 active landfills, has a joint venture with a unit of BP to install gasworks at 43 of its dumps. The Phoenix firm has 65 landfill-gas plants. Some feed utility pipelines. Others generate electricity on site.

Republic is also spending about $275 million to build four polymer-processing facilities that will sort the plastic it collects kerbside and turn it into flakes for new bottles and jugs.

Vander Ark said consumer-product companies face minimum post-consumer-content mandates in California, Washington and other states, as well as their own sustainability goals. Republic’s first plastics plant is scheduled to open later this year in Las Vegas. Customers lined up.

“There’s fighting among customers about who gets what,” Vander Ark said.

Analysts say one risk is that adding exposure to volatile markets for commodities and renewable-fuel credits might spook investors interested in the steady and predictable profits involved in dumping garbage into landfills. Executives say the sustainability businesses are supplementary and moneymakers even when commodity prices are low, like now.

“Yes, there’s a year-over-year impact, but recycling is still profitable,” said Tara Hemmer, WM’s chief sustainability officer. “It still is one of our highest return-on-capital investments.”

WM, which operates more than 250 landfills, is in the second year of a four-year plan to spend $1.2 billion adding 20 trash-gas plants as well as $1 billion expanding and automating its recycling business.

The Houston company expects new and upgraded facilities to increase its recovery of reusable materials 25% by 2025. Having machines do the dirty work also cuts labor costs, executives say.

A lot of hard-to-fill jobs will be replaced by optical sorters, which use infrared cameras to spot valuable materials in the jumble and blow the desirable bits into separate bins with pinpoint puffs of air, Hemmer said.

“In the past we might have had mixed-paper bales that had cardboard embedded in them,” she said. “Now we’re able to pull more of that cardboard out, it goes in the cardboard bale, and the price point on cardboard is much higher than mixed paper.”

WM says the blended commodity value from its automated material recovery facilities is about 15% higher per ton. Not only do the machines amass more of the valuable stuff, the company says the material emerges cleaner and can fetch more than messy bales.

The recycling investments will add $240 million to its bottom line over the next four years, WM says. It has higher expectations for its gas business.

WM says it will boost landfill-gas output eightfold and generate more than $500 million in additional earnings before interest, taxes, depreciation and amortisation through 2026.

That profit forecast assumes two prices associated with every million British thermal units of gas. WM is counting on the actual fuel selling for $2.50, which is lately about the price of gas from geologic wells. Another $23.50 is anticipated from renewable-fuel credits, which is in line with recent trading, according to energy-information firm Platts.

The outlook doesn’t count the $250 million or more of tax credits WM expects for building new gas plants.

Last year’s climate bill sweetened the economics of trash gas. A federal proposal to offer additional credits for biogas projects that produce power for electric vehicles could make the incentives even stronger.

Waste-company executives and analysts say that many are worth building anyway and that the incentives make it economical to install gasworks at smaller, less-gassy landfills.

“Landfill gas is essentially the only scalable biofuel that doesn’t have a food-for-fuel trade-off,” said Goldman Sachs analyst Jerry Revich. “These projects don’t need any subsidies, but they will take the free money.”

Happy is the family whose members—parents, grandparents and grown children—trust each other enough to cooperate on shared goals, especially financial ones. When that is truly the case, Uncle Sam’s tax rules can help as well.

This matters especially now that mortgage rates are above 7%, and many families are looking for ways to help younger members. If the elders have resources and are confident younger ones can cooperate, a family loan could make homeownership possible while providing the elders with a useful income stream.

Other strategies can actually lower taxes, such as when funding 529 plans or Roth IRAs, or when someone inherits a traditional IRA with required withdrawals larger than they will need.

Here are three strategies useful for functional families.

Intrafamily loans

It is perfectly legal for families to lend money to a relative for a down payment or even a private mortgage.

But it is important not to cut corners, says Ryan McKeown, a CPA with Modern Wealth Enhancement in Minnesota. If the loan is for a down payment, be honest with the mortgage provider and have a formal agreement. The lender owes tax on the interest payments received.

If the loan is for a private mortgage, both sides should have legal representation with a formal written agreement, including payment terms. The lender owes tax on the interest, and the borrower often can deduct it if he or she itemizes.

To avoid IRS trouble, the interest rate shouldn’t be lower than the agency’s Applicable Federal Rate at the time of the loan. Currently that is about 5% for loans longer than nine years; about 4.5% for loans three to nine years; and about 4% for loans three years or less. Currently, traditional mortgage rates are generally above 7%.

In addition, the lender could use the $19,000 annual gift-tax exemption (described below) to forgive some or all of the interest or principal annually. If both lenders and borrowers are married, that is up to $76,000 a year. There is no tax for the borrower on such forgiveness, because it is from a gift.

If you’re going this route, McKeown advises against having a fixed plan to forgive the debt. Instead, do it in one-off letters specifying the amount—and keep careful records. Otherwise the IRS might try to treat the loan as a taxable gift.

Asset gifts

Powerful tax-saving moves for families often use gift-tax provisions. Under current law, anyone can give anyone else up to $19,000 of assets annually, free of gift tax. That means a married couple with three grandchildren could give them a total of $114,000 in 2026.

The gifts can be cash or other assets, like stock. For noncash gifts, the cost basis—which is the starting point for measuring taxable gain after a sale—“carries over” to the recipient. So if someone buys $1,000 of stock and gives it away when it is worth $5,000, the recipient’s cost basis is $1,000. If the recipient later sells the shares for $8,000, the taxable gain is $7,000.

Here’s an example showing how gifts could save a family taxes. Grandma is a widow of modest means, while her child and spouse have prospered. The couple has two children, and they want to contribute $5,000 to a 529 college-savings plan for each—but they need to sell stock to do it. Their tax rate on the sale would be 18.8%, and they would need to sell about $11,000 of stock.

However, Grandma’s federal tax rate on the stock sale is 0%. If the couple gives $10,000 of shares to Grandma, she could sell them, pay no tax, and fund the grandchildren’s 529 plans. This saves about $1,000 of tax.

These moves are legal, and they could be used in other ways, such as to help a young person fund a Roth IRA.

But trust among family members is essential: Under the law, givers can’t put conditions on a gift. Grandma could use her stock proceeds to take a cruise, but she makes 529 contributions instead.

Mark Sellner, a retired tax attorney and CPA living in Sarasota, Fla., uses this strategy. His children sell stock he gives them and fund 529 plans for his grandchildren.

The family’s tax savings aren’t huge, but he likes other benefits. The sales by his children don’t boost his adjusted gross income, which in turn could raise his Medicare Irmaa premiums or his 3.8% surtax on net investment income.

Sellner doesn’t worry about his children using the funds for another purpose.

“There can’t be any strings attached to gifts. Of course, it is up to us to decide whether to make them in the future,” he says.

Two caveats: The “kiddie tax” applies to most children under age 24, and it is levied at the parents’ rate on investment income above $2,700 in 2026. Consider this before making gifts to a young person.

Investors who give away stock also forgo the step-up, an important provision that exempts assets held at death from capital-gains tax.

Sellner knows he’s losing a step-up, but says, “The children could use a little more now. Why should they wait 20 years to get it?”

Disclaimers

A disclaimer is a highly useful strategy in which one heir renounces an inheritance in favor of another heir. Assuming family members cooperate, this can save taxes.

Here’s one example. Dad died and had a large traditional IRA that he left to Mom. She has enough assets and income to cover her expenses, and she lives in a state with a stiff estate tax. The inherited IRA would put her estate over the threshold.

Also surviving are three young-adult children. If Mom disclaims all or part of Dad’s IRA within nine months of his death, that amount could go directly to the children. They will have 10 years to empty the account, and the family as a whole will likely save estate and income taxes.

Disclaimers have many key details, especially regarding beneficiary documents. Although heirs have great freedom in choosing what assets to disclaim, the rules about who gets disclaimed property are rigid. It is best if the original owner names tiers of heirs so that if one disclaims, the next recipient is clear.

Wall Street’s Next Big Play Is Garbage

Landfill firms are investing in trash-gas production and recycling technology

Strong family financial planning can help reduce taxes and support younger generations. From intrafamily loans and asset gifts to inheritance disclaimers, strategic cooperation can create meaningful financial benefits—when families have the trust and structure to make it work.

Intrafamily loans

Asset gifts

Disclaimers