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The Cleanaway share price soared 22% in August. Time to buy?

garbage man holding broom and giving thumbs up representing rising cleanaway share price
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Cleanaway Waste Management Ltd (ASX: CWY) has just capped off a stellar month for shareholders. Over the month of August, the Cleanaway share price went from $2.12 to $2.58 on yesterday’s closing price. That represents a gain of 21.7% with the Cleanaway share price now up 26.4% in 2020 so far. The shares have pulled back slightly on the first day of the new month today and are going for $2.54 at the time of writing.

Why did Cleanaway clean up in August?

The Cleanaway share price had a top month in August for one big reason: the company’s impressive earnings report for the 2020 financial year. Cleanaway released its earnings report last week, and investors were very pleasantly surprised.

Cleanaway managed to deliver a 2.1% increase to revenue and an 8.7% increase to its earnings per share (EPS). Free cash flow was also up an impressive 11.5%.

That enabled Cleanaway to announce a 2.1 cents per share fully franked final dividend, which represents a 10.5% increase on FY19’s final payout. For FY20, the company will pay out a total of 4.1 cents per share, which is a 15.5% increase on FY19’s 2.55 cents per share.

Companies that have the capacity to not only keep steady but increase their dividends in 2020 have been very few and far between. Most ASX shares have been going in the other direction. Thus, I think this is the primary reason why investors have been clambering to buy Cleanaway over the past month.

Is the Cleanaway share price a buy today?

There’s a lot to like about this company in my view. It is growing at a healthy (if uninspiring) rate and has proven to be highly resilient and defensive in these tough economic times. Garbage and waste collection is something we all need and expect and this isn’t going to change anytime soon. It’s as future-proof a sector as you can get.

Saying that, the market is certainly putting a premium on the Cleanaway share price that, in my opinion, more than reflects this reality. On current prices, Cleanaway is trading on a price-to-earnings (P/E) ratio of 46.37. The current average for the S&P/ASX 200 Index (ASX: XJO) is 18.34.

I’m not too sure a company growing revenues at 2.1% deserves such a multiple. Therefore, I’ll be staying away from Cleanaway shares at these prices. It’s a great company, but as Charlie Munger once said, “No company, no matter how great, is worth an infinite price”. Over the past year, the Cleanaway share price has fluctuated between $1.40 and $2.59. With such a volatile stock, I’d be far more comfortable waiting for a dip than buying at today’s prices.

Where to invest $1,000 right now

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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