Buffett And Gates: The “Foundation” Of A Blue Chip Portfolio
The Bill & Melinda Gates Foundation is currently the largest private foundation in the world, notes Nikolaos Sismanis, the editor of 13FSmartMoney and a contributor to MoneyShow.com. Here, the advisor reviews the most significant holdings in the underlying portfolio.
The Foundation is a tax-exempt entity aiming to provide charitable donations worldwide, while its underlying Trust still aims to deliver positive returns to be able to fund said donations sustainably in the future.
The Trust holds more than $43 billion in net assets, and its Trustee is Bill Gates’ long-term friend Warren Buffet, who has pledged the majority of his fortune to the Foundation
The Foundation is a tax-exempt entity aiming to provide charitable donations worldwide, while its underlying Trust still aims to deliver positive returns to be able to fund said donations sustainably in the future. While its goal is not necessarily to maximize returns, it still aims for its investments to appreciate in order to maintain its long-term charitable goals.
As a result, its holdings may include some ideal picks for investors looking for some low-volatility, blue chip stocks to allocate their capital, that Bill & Melinda Gates’ Foundation has trusted in appreciating in the long run. As of its last F13 filing, the Foundation’s Trust had around $22 billion in managed 13F securities.
The Foundation’s largest investment
In 2006, Buffett pledged most of his fortune to the Gates Foundation by donating 10 million shares of Berkshire Hathaway (BRK.B), which was then worth approximately $31 billion. Since then, continuous contributions have lifted the total amount of shares held by the Foundation to nearly 47 million.
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At Berkshire’s current share price of around $229, the Foundation’s stake is valued at around $10 billion, or around 45.4% of its total holdings. In fact, the Foundation increased its position in Berkshire by 18% from last quarter, displaying its unconditional faith in the conglomerate once again.
As we mentioned, the Trust has to be generating enough returns that are more or equal to the Foundation’s donations, so that it doesn’t drain its funds over time. In the past, investing in bonds would be an ideal option. However, in the current ultra-low environment, it has to resort to equities. The challenge that arises is that while equities may deliver superior returns, they can also be more volatile.
Berkshire Hathaway perfectly fits the Foundation’s goal of generating constant and low volatility returns, as the Oracle of Omaha has demonstrated by successfully managing the company for decades. Combined with Warren Buffet’s similar philanthropic aspiration, we can see why Bill & Melinda’s Foundation has such a high exposure in Berkshire.
The company is able to use its float from its privately owned businesses, such as Geico Insurance and BNSF Railway, to allocate towards its public-equity investments, which normally are blue chip, and much-reliable companies. Examples include Coca-Cola (KO), Bank of America (BAC), American Express (AXP), and other long-term proven compounders.
Berkshire’s largest holding, by far, is Apple (AAPL). Warren Buffet’s regular additions to the position combined with Apple’s aggressive stock buybacks have resulted in Berkshire owning around 6% of the company’s shares. The position makes up nearly half of Berkshire’s portfolio.
While this may cause some diversification concerns, investors should have little worries, as the company is a consistent free cash flow generation machine with around $90 billion in cash.
Further, Berkshire itself holds around $145 billion in cash, making for nearly 30% of its total market cap. During the latest quarter, Berkshire trimmed its position in Apple by around 3%, most likely due to diversification reasons post-Apple’s prolonged rally.
Additionally, Berkshire increased its position in Bank of America by 9%, to $24.3 billion. The conglomerate’s stake accounts for nearly 11% of the bank’s shares after asking for special permission by the SEC to hold more than 10% of a publicly traded bank. Considering that Mr. Buffet and his team went into this extra trouble to acquire more of Bank of America, the company must be viewed as an incredible long-term holding.
Despite the challenges caused by COVID-19, the bank delivered around $4.88 billion in net income during Q3, and hence is currently trading at an attractively priced P/E ratio of just 14.28.
Combining Bank of America’s considerable buybacks and rapid dividend growth, we expect Berkshire’s stake to grow further going forward, which should be an encouraging factor for retail investors to jump in the stock, and co-benefit along with Berkshire.
Source: Berkshire’s filings, Author
Combining Berkshire’s cash-rich balance sheet, blue-chip stock portfolio, and solid private investments, Bill & Melinda’s Foundation can rely on Warren Buffet’s expertise to generate consistent and low volatility returns over the long haul.
For an investor looking for stable performance and a great margin of safety, Berkshire Hathaway is, without a doubt, a great pick, especially considering that the largest private Foundation in the world has placed most of its funds in.
The Foundation’s most significant stock investments
Following Berkshire’s philosophy and investing principles into the rest of his Foundation’s portfolio, Bill Gates has similarly been a fan of trustworthy companies that have historically proven to be a quality investment over time.
As a result, the rest of the Trust’s most significant holdings are also blue-chip stocks. The Foundation barely changes its holdings over the years, which further displays Warren Buffet’s “hold-forever” influence in its management.
Waste Management (WM)
Waste Management is one of Bill Gate’s favorite stocks since he has also been buying shares for his personal portfolio, outside of his Foundation. The company occupies around 9.55% of the Trust’s portfolio, positively checking the criteria boxes of being a long-term compounder of stable returns.
The stock is paying the Foundation with consistent dividends, which have been growing annually for the past 10 years with a CAGR of 5.6% of this period. Waste Management’s essential and consistently needed services generate very reliable cash flows, which are often locked through multi-year contracts with governmental entities.
Simultaneously, because of the company’s reliable cash flows, shares are generally trading at a pricy valuation of around 34 times the underlying earnings, despite its relatively limited growth. Still, Waste Management should continue delivering stable returns over the long-term as it turns trash into cash!
Waste Management reported quarterly revenues of $3.86 billion in its latest quarter, a slight reduction of just 2.8% year-over-year, showcasing its ability to be overall unaffected from the conditions of the underlying economy due to its essential-services business model.
Net income remained robust, at $390 million, as the company was able to maintain its net income margins at its historical average at around 10%, despite incurring additional costs due to COVID-19.
We believe that Waste Management will continue to be one of the foundation’s largest holdings as its low-volatility business mode, resilient cash flows, and contractual rates, which are expected to grow over time above the CPI, make it an incredible fit for the Foundation’s growth and stability needs.
Canadian National Railway (CNI)
Following a similar philosophy, Bill Gates’ investment portfolio includes a position in Canadian National Railway, which occupies around 8.2% of its holdings. The company also features a dividend growth record of 15 conductive annual increases, which its stable business model has helped achieve.
With most of the world’s basic consumables, materials, and commodities requiting transportation by train, Canadian National Railway’s services will always be needed in the modern world, despite its old-fashioned business model. As a result, the company has been delivering solid profitably during the months of COVID-19, despite the pandemic’s challenges.
During Q3, the company posted revenues of $2.56 billion and net income of $739 million, which indicates a jaw-dropping net income margin of nearly 30%. We believe that the company remains an excellent long-term holding, with a safe payout ratio and promising growth prospects through its rail expansion plans.
Proudly included in the Dow Jones Industrial Average for its long-term value creation in the industrial sector, Caterpillar is a good ol’ American stock, featuring an uninterrupted dividend record since 1993. While its revenues were slightly reduced over the past couple of quarters due to COVID-19, the company has remained profitable, as its cash flows are well diversified with a global presence.
Demand for construction machinery remains strong, and the dividend is covered by almost two times the company’s earnings, despite its reduced turnover as of recently. In Q3, the company’s sales were down by 23% to $9.9 billion, while EPS fell by 50% to $1.34 due to contraction volumes remaining weaker compared to last year due to the ongoing pandemic.
However, considering Caterpillar’s moat due to its massive worldwide operations and decades of shareholder value creation, the stock may provide a good entry point for investors looking to hold it for the long-term.
The company was able to sustain profitability, even under the current adverse circumstances. Therefore, we expect EPS to grow rapidly as soon as its top-line returns to normal levels post-COVID, making the current forward P/E of around 25 a compelling valuation multiple for such a quality company.
Showcasing a dividend growth of 47 consecutive annual dividend increases, Dividend Aristocrat Walmart is battling to get into e-commerce and leverage its world-class distribution network to actively compete with Amazon. The stock is currently trading at all-time highs, as the company is making notable progress in its online segments, while its essential retail locations have been proving solid results, despite the pandemic.
During Q3-2020, the company reported e-commerce sales were 79% higher YoY (97% higher in Q2), which is greatly promising new for investors who were starting to worry the retail giant was falling behind of the current global online trends.
While the stock’s valuation may be looking attractive at around 21 times its earnings, it is actually quite high compared to its historical one in the low teens. Due to its prolonged valuation expansion, shares currently have a 15-year low yield of around 1.5%. Still, its rapidly growing e-commerce segment should compensate investors in the long-term for slightly overpaying at Walmart’s current price levels.
Crown Castle (CCI)
One of the most rewarding stocks in Bill Gate’s charitable portfolio is its stake in Crown Castle, which has spoiled investors over the past decade by generating CAGR returns of around 17% over this period. The company’s cell towers are positioned to benefit from the upcoming 5G revolution, while its current towers provide the company with incredibly secured cash flows.
They are leased to all of the telecommunication giants through multi-year contracts, and still, the Trust’s largest investment is expected to remain the same, as Warren Buffet’s heavy involvement with the fund synergizes with his goal to distribute the majority of his wealth to charity.
While many of the stock’s mentioned may lack the potential to deliver explosive returns, their huge moat and essential operations to society guarantee them steady profitability, making them an ideal pick for those looking to allocate capital into low-volatility, but also gradually growing companies.
Crown Castle’s rental payments face no correlation to the underlying economy, as telecom providers need to offer consistent cellular coverage. Its rental revenues even grew over the past couple of quarters, despite COVID-19, showcasing their stability under any economic environment.
The company’s latest dividends per share increase of 11% should further reassure investors of Crown Castle’s prospects, while the increased yield to around 3.24% should create a more attractive investment case for those looking for tangible returns. The combination of yield and rapid dividend growth make for a quite solid dividend growth pick.
With another Dividend Aristocrat on board, Bill Gate’s charitable portfolio holds another long-term compounder with 27 years of consecutive dividend increases. The company’s revenues were slightly affected during the pandemic, causing it to report its first quarterly loss in more than 25 years.
However, Ecolab’s services remain incredibly essential as it is a market leader in water treatment, cleaning, and sanitizing solutions whose demand remains strong, especially during a pandemic.
The market is well aware of that, which is why shares are trading near all-time highs despite the recent challenges. For those who don’t mind Ecolab’s tiny dividend yield, the stock remains highly investable for those looking to buy and … “forget about it.”
United Parcel (UPS) and FedEx (FDX)
Collectively occupying around 7% of the Foundation’s portfolio, United Parcel & FedEx are two more industrial heavyweights whose operations are essential for non-stop demand for home deliveries all over the globe. Both stocks are trading at all-time highs, currently, as COVID-19 has accelerated the demand for everyday essentials to consumers’ doorsteps due to the staying-at-home economy.
Amazon (AMZN) has been making progress in developing its own delivery fleet over the years, which initially panicked investors. However, the market has become well aware that both UPS and FedEx’s humongous distribution networks around the world are incredibly hard to replicate quickly. Further, both companies have decades of expertise in the sector, which has forged a superb moat through their duopolistic operations.
Despite their prolonged rally over the past few quarters, the two companies provide a healthy combination of dividend growth and low volatility operations, which can fit greatly to portfolios looking for such characteristics, similar to the Foundation’s ones.
Overall, Bill and Melinda Gates’ Foundation holds reliable stocks that are able to achieve consistent turnover during the toughest economic environments, in order to provide the Foundation with adequate returns to donate to charitable causes. Most of its holdings have a relatively low beta, which helps with avoiding intense price swings, and hence deliver more predictable returns.
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