Bill Gates is best known as the co-founder of Microsoft(NASDAQ: MSFT), which has been one of the most valuable companies in the world for the past 30 years. After his wealth soared to more than $100 billion in the 1990s amid the run-up in tech stocks, Gates started to step back from his business to focus on his philanthropic endeavors. He founded the Gates Foundation to combat poverty, disease, and inequity worldwide.
Today, Gates is still worth over $100 billion, despite donating huge sums to the foundation, including a considerable number of Microsoft shares. He plans to donate practically all of his wealth over the next two decades, winding down the foundation by 2045. He expects the foundation will spend more than $200 billion in that time.
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Supporting all that spending is a trust fund, including a public equity portfolio worth about $33 billion. Last quarter, the investment managers in charge sold the last of Gates’ most recent Microsoft donation, leaving 43% of the portfolio invested in just two phenomenal stocks.
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Microsoft has always been a standout investment
The Gates Foundation trust fund is primarily invested in value stocks. Often, well-established, boring businesses with wide competitive moats. While it might include a few growth stocks, they represent relatively small positions in the portfolio. Microsoft has historically been the biggest exception.
The trust’s portfolio largely reflects Gates’ personal portfolio, which is also full of value stocks. He’s drawn significant influence from Warren Buffett, former CEO of Berkshire Hathaway(NYSE: BRKA)(NYSE: BRKB), who’s been a longtime donor to the Gates Foundation.
That said, the foundation still has significant exposure to Microsoft stock through Gates himself. He owns 103 million shares of the company worth about $43 billion. Considering his plans to donate practically all of it to the foundation over the next 20 years, it makes sense to reduce its exposure in the trust fund.
Despite the investment manager’s decision to sell shares, Microsoft looks like a great stock to buy right now. The cloud computing and software businesses are both growing quickly, and there are no signs of that slowing down amid ongoing demand for artificial intelligence (AI) compute and services. Despite the strong growth, shares trade for just 25 times forward earnings, an attractive price for the high-performing business.
The Gates Foundation’s top holding
The top position in the Gates Foundation’s remaining $33 billion portfolio is Berkshire Hathaway Class B shares. Warren Buffett donates a large number of shares to the foundation every summer as part of his annual giving. The only stipulation is that the foundation spend the full value of his donation, plus an additional 5% of its remaining assets each year. That’s become an increasingly high bar to meet as the value of Berkshire shares has climbed.
Still, the investment managers have been able to retain a considerable number of Berkshire shares over the years. While they do sell portions from time to time, Buffett is constantly refilling the bucket. The stock now accounts for about 25% of the portfolio, based on the foundation’s most recent 13F filing with the SEC and current stock prices.
Berkshire Hathaway produced solid first-quarter results under new CEO Greg Abel. The insurance underwriting business saw profits improve after the California wildfires last year. It’s also showing progress in improving the operating margin for the railroad business, an area Abel called out in his first letter to shareholders in February. Abel also made some significant moves in the investment portfolio, although the net cash pile on its balance sheet continued to climb thanks to strong operating earnings.
The stock has dropped to an attractive price-to-book ratio of just 1.4. That’s around the lowest level it’s traded at in the last three years, making it an opportune time to pick up shares. Abel made a small buyback in the first quarter, but nothing substantial, which could signal his belief that much of the marketable equity portfolio is still overvalued. But less conservative investors may find the stock attractive right now.
One of the longest-held stocks in the portfolio
The second-largest position in the Gates Foundation trust is WM(NYSE: WM), formerly Waste Management. WM is exactly the kind of business that would attract Gates or Buffett, a large, dominant company with a wide competitive moat. It’s been in the Gates Foundation trust for decades, with relatively few sales over the years. It now accounts for about 18% of the portfolio’s total value.
The company’s moat stems from its unmatched landfill portfolio, which includes 262 active solid waste landfills. It also owns 18 medical waste incinerators and a handful of other facilities supporting its network. WM also benefits from its massive scale, which allows it to create denser routes to serve more households with fewer trucks in less time.
That’s led to strong margin expansion over time. Last quarter, EBITDA (earnings before interest, taxes, depreciation, and amortization) margin expanded to 29.8%, up 70 basis points year over year. That was fueled by cost optimizations and its efforts in renewable natural gas production, but offset by worse weather. Investors should expect continued profit margin expansion thanks to its pricing power and the scaling of new businesses, such as its sustainable energy and medical waste businesses.
The stock trades for nearly 27 times earnings expectations, which is a premium price to pay for a business that’s growing relatively slowly. But the strong competitive advantages lead to predictable revenue and free cash flow, which provide additional growth opportunities for the business down the line. In fact, it trades at a relative discount to other waste haulers. It’s a small premium to pay for a wonderful business.
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Adam Levy has positions in Microsoft. The Motley Fool has positions in and recommends Berkshire Hathaway and Microsoft. The Motley Fool recommends WM. The Motley Fool has a disclosure policy.
