By Adam Levy
Key Points
- The Bill and Melinda Gates Foundation trust manages a large portfolio of just a few great stocks.
- The Microsoft founder has donated his own company’s stock along with many other investments over the last 25 years.
- Warren Buffett served as a trustee for the foundation, and his influence is quite evident in its investment portfolio.
When Bill Gates became a billionaire in 1987, he was the youngest person to reach that milestone. He reached billionaire status at 23, and 12 years later became the first centibillionaire, achieving a $100 billion net worth well ahead of anyone else.
Gates and his then-wife Melinda established a charitable foundation in 2000 to enhance healthcare and reduce poverty around the world, the Bill and Melinda Gates Foundation. Over the past 25 years, Gates has donated much of his wealth to the foundation, and he plans to donate the entirety of his assets to charity throughout his lifetime.
Gates’ fellow centibillionaire Warren Buffett has also pledged donations to the Gates Foundation since 2006, but those contributions will end after his death. Buffett also served as a trustee for the foundation until 2021, and likely influenced how the trust invests its funds.
The trust’s equity portfolio is currently valued around $48 billion, but more than two-thirds of that amount, about 69%, is invested in just three stocks.
- Microsoft (31%)
Gates donated $20 billion to his foundation in 2022, and it appears a large chunk of the donation came in the form of Microsoft (MSFT 0.17%) stock. Gates is still one of the largest shareholders in the company he founded, and the company’s stock still accounts for a large portion of his wealth. The trust added about 38 million shares to its portfolio in 2022, worth about $8.9 billion at the time.
The trust fund still has almost 35 million shares of the stock left in its portfolio, and the value has climbed to $14.8 billion. Holding on to those Microsoft shares has worked out well for the foundation (and Gates). The stock is up more than 60% since July of 2022, when Gates made his donation.
Microsoft’s strong performance over the last two years can be attributed to its role in the growth of generative artificial intelligence. The company increased its investment in generative AI leader OpenAI in early 2023, and it became a top cloud computing platform for AI developers as a result of its close ties with company. Microsoft’s cloud platform, Azure, saw AI customers grow nearly 60% year over year in its most recent quarter, surpassing 60,000 total.
Meanwhile, Microsoft is injecting AI capabilities into its industry leading enterprise software — 77,000 organizations use its Copilot software to improve productivity and creativity across Github, Office, and their own native applications. And the number of customers continues to grow quickly, up 60% sequentially in the most recent quarter.
Shares of Microsoft currently trade around 32 times forward earnings estimates. That’s certainly a premium to the S&P 500, but its stock deserves a premium price. Its position as a leading cloud platform for AI developers combined with the massive enterprise software customer base to sell Copilot into gives it a long runway for growth. On top of that, its cash position and free-cash-flow generation gives it plenty of capital to deploy to take advantage of growth opportunities.
- Berkshire Hathaway Class B shares (23%)
As mentioned, Warren Buffett is a regular donor to the Gates Foundation, and his most recent donation arrived last quarter in the form of 9.9 million Class B shares of Berkshire Hathaway (BRK.B 0.93%). Buffett uses the ability to convert super-voting Berkshire Hathaway Class A (BRK.A 0.89%) shares to Class B shares before donating in order to maintain control of the company.
Buffett’s donation pushed the trust’s position in Berkshire Hathaway to nearly 25 million shares. Those shares are worth about $11.2 billion today.
But the trust’s Berkshire position will likely shrink over the next year. Buffett’s donation stipulates that the Gates Foundation must spend every penny he donates plus an additional 5% of its net assets. Gates has pledged to increase the foundation’s spending from $6 billion in 2022 to $9 billion by 2026, and plans to spend $8.6 billion in 2024.
Berkshire Hathaway has outperformed the market in 2024, up about 26% as of this writing. Strong operating performance and investment management has resulted in far better performance than the average value stock. Around 60% of Berkshire’s value is tied to its cash and equities, while the other 40% is tied to its wholly owned businesses, including insurance operations and railroads.
With a current valuation above 1.6 times book value, the stock looks expensive. But with a delevered balance sheet for the first time in a long time, it may be worth the premium valuation because those assets could drive significantly better returns in the future.
- Waste Management (15%)
Waste Management (WM 0.13%) is the leading waste hauler in the U.S. Not exactly the high-tech operation you might associate with Bill Gates. It is, however, the type of boring wide-moat business you’d associate with Warren Buffett.
The Gates Foundation Trust holds more than 35 million shares of Waste Management worth about $7.3 billion as of this writing. The stock has performed well in 2024, but took a step back after second-quarter numbers disappointed investors. The long-term outlook for the business remains strong, and the near term doesn’t look too bad either. Management ultimately raised its full-year guidance for EBITDA and free cash flow with its earnings results.
Waste Management benefits from its scale. It owns more landfills than its competitors and operates high-density routes (which means it can serve more businesses and households more efficiently). That position also gives it pricing power, and the free cash flow to grow via acquisition. Its most recent acquisition agreement with Stericycle is set to close in the fourth quarter.
The stock currently trades at an EV-to-EBITDA ratio of less than 17. That’s a price comparable to its closest competitors. But with its market-leading scale and ability to acquire smaller companies and potentially add value and exercise operating leverage, it should be able to outperform at this price.
Culled from: The Motley Fool
