This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Bill Gates would be worth well over $1 trillion today if he never gave up a single share of the 45% stake in Microsoft (NASDAQ: MSFT) he held just after the company's 1986 initial public offering (IPO). Over the last 39 years, however, he has strategically sold off shares of the company he founded to diversify his personal investments and donate much of his wealth to charity.
Most of Gates' charitable donations go to the Bill & Melinda Gates Foundation, which aims to enhance healthcare and reduce poverty around the world. Gates isn't the only billionaire donating to the foundation. Warren Buffett has made an annual contribution since 2006. The CEO of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) also served as a trustee until 2021.
The foundation's trust includes an equity portfolio with a value of about $44 billion as of this writing. Roughly two-thirds of that portfolio is invested in just three stocks.
1. Microsoft (29%)
You might not be surprised to find that Microsoft, the company Gates co-founded, is the largest holding in his foundation's trust. But that wasn't true for most of the foundation's life.
In fact, Microsoft remained notably absent from the foundation's portfolio disclosures between 2002 and 2017, when Gates made his first donation of Microsoft shares since 2000.
Gates added to the donation in 2022, and the trust held nearly 29 million shares as of the end of September. Those shares are worth about $12.5 billion as of this writing.
The trust only recently started selling the 2022 infusion of shares to fund its grants and operations, reducing its stake by about 26% over the last four quarters. But as Microsoft shares have soared in value, they remain its top holding.
The stock price is up over 60% since July of 2022, when Gates last donated shares. That performance was driven by its strong position at the forefront of generative artificial intelligence (AI).
Microsoft made an early investment in OpenAI, the creator of ChatGPT. It added to its investment in early 2023, positioning itself as the top choice for developers looking to use its public cloud offerings to create their own AI-powered applications.
Azure, Microsoft's cloud computing segment, saw revenue accelerate to 33% growth in its most recent quarter. And management expects even faster growth in the quarters ahead as its big capital investments in data centers come on line later this year.
Meanwhile, Microsoft remains a leader in enterprise productivity software and PC operating systems. That gives it a great platform to sell its Copilot AI services to hundreds of millions of potential customers. Adoption is rising quickly, with sequential growth exceeding 50% across its portfolio of Copilot options.
Microsoft shares currently trade for around 33 times forward earnings. That's a significant premium to the overall market, but it is worth the premium price. The company leads the market in two important AI areas (cloud computing and enterprise software) with accelerating growth.
Meanwhile, it produces significant free cash flow, which management uses to buy back shares, increasing the value of future earnings to remaining shareholders.
2. Berkshire Hathaway (23%)
Warren Buffett has made an annual contribution to the Bill & Melinda Gates Foundation since 2006. It always comes in the form of Berkshire Hathaway Class B shares. Buffett converts his super-voting Class A shares to Class B in order to donate his wealth without losing control of his company.
As of the end of the third quarter, the Gates Foundation trust fund held about 22 million shares of Berkshire Hathaway. Those shares are worth about $10 billion as of this writing.
The foundation will likely sell some of those shares before Buffett's next donation this summer. The Berkshire CEO stipulates the Gates Foundation must disseminate the entirety of his donation each year, plus an additional 5% of its net assets. Nonetheless, the trustees have worked to maintain a substantial stake in the conglomerate by selling off other assets.
Much of Berkshire's value is tied to its massive investment portfolio. The company holds equities valued around $300 billion, as of this writing.
It also holds about $325 billion in cash and Treasury bills. Buffett has been selling some of the company's biggest holdings in favour of the safety of Treasuries over the last two years as stock prices have soared higher. Meanwhile, Berkshire Hathaway's wholly owned businesses have produced strong results. Operating income grew 17% year over year through the first nine months of 2024.
The strong performance of Berkshire's core operations and the overall stock market propelled shares 27% higher in 2024, slightly outperforming the S&P 500. But Buffett's valuation concerns for many of Berkshire's top holdings have also extended to Berkshire Hathaway shares themselves in recent months. For the first time since 2018, Buffett decided not to buy back a single share of his company's stock in the third quarter of 2024.
While shares have come down in valuation from their high in the third quarter, the price still remains relatively high compared to its historical levels. They currently trade for about 1.6 times book value. But considering Berkshire Hathaway is holding $325 billion in cash and producing very strong operating results, it could be worth the premium price.
For what it's worth, the vast majority of Buffett's net worth remains tied to Berkshire Hathaway.
3. Waste Management (15%)
Waste Management (NYSE: WM) is one of the longest-held stocks in the Gates Foundation's trust, and the trustees have continuously added to that over the years. The foundation held 1.2 million shares in 2022, and that number was 32.2 million shares as of the end of last September.
And that's after the trustees sold 3 million shares in the third quarter (just its third sale since 2002). Those shares are worth about $6.5 billion as of this writing.
It isn't an exciting business, but that doesn't mean investors shouldn't be excited about the stock. Its dominant position in waste disposal stems from its landfill holdings. With significant regulatory hurdles for buying and creating new landfills, it's unlikely new competitors will challenge Waste Management anytime soon. In fact, third parties pay the company fees to use its landfills and other assets.
Waste Management's position gives it a few ways to grow earnings. First, it has significant pricing power, as exemplified in 2021 and 2022. It was able to raise prices to more than keep up with inflation. Second, its scale allows it to create denser routes for trash and recycling pickup, improving the profitability of its operations relative to smaller competitors. Lastly, it can acquire tangential and competing businesses, as it recently did with medical waste specialist Stericycle.
Management has executed on all three fronts in recent years. Earnings before interest, taxes, depreciation, and amortisation (EBITDA) grew 11% in the third quarter on the back of record profit margins. Going into 2025, the company expects "a significant step change in revenue, earnings, and free cash flow." In December, it was confident enough to increase its dividend 10% for the year.
The stock currently trades for an enterprise-value-to-EBITDA ratio of 16. That's roughly in line with its five-year average, and on par with its biggest rivals in the space. But considering the strong outlook for 2025 and beyond, it may deserve a premium price. There's a reason the Gates Foundation has held on to shares of Waste Management so long. It's a solid stock: a great business trading at a fair price.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
