Why Did Bill Gates Buy Waste Management Stock?

Bill Gates is best known as the founder of Microsoft, but most of his efforts in recent years have involved charitable work through the Bill and Melinda Gates Foundation.

In addition to being one of the world’s most famous philanthropic organizations, the foundation is also a massive financial entity with a large stock portfolio. Surprisingly, one of the largest holdings Gates keeps in his foundation’s portfolio is trash disposal company Waste Management (NYSE:WM).

Bill Gates’ stake in Waste Management is surprisingly large for an investor who is far better known for his accomplishments in the technology field. 15.4 percent of the Gates Foundation’s holdings are invested in Waste Management, making it the fourth largest holding. This represents an estimated $5.6 billion in total market value.

Why Bill Gates Is Bullish on Trash

It’s worth noting that Waste Management isn’t Bill Gates’ only trash disposal stock. The Gates Foundation also holds stock in Republic Services, another publicly-traded waste removal company.

One of the simplest explanations for Bill Gates holding large stakes in waste disposal companies is the fact that these businesses also handle the bulk of US recycling. Given that Bill Gates has spent much of the last decade pursuing social and environmental initiatives through his foundation, companies that contribute to greater sustainability likely appeal to him on a personal level.

Trash and recycling companies also enjoy effective moats within their markets due to the high barriers to entry in the industry. This, combined with the necessity of trash collection services in all market conditions, makes these stocks fairly safe long-term holdings.

Finally, Bill Gates is a long-time friend of Warren Buffett. The 30-year association between the two business giants may have given Gates a healthy respect for and desire to emulate Buffett’s value investing strategies. As such, there’s a reasonable chance that Gates bought Waste Management stock because he believed it was undervalued when he first acquired it. It’s worth noting here that Gates has owned shares in Waste Management for well over a decade.

While there’s no definitive answer available from Bill Gates himself, the odds are that all of these factors played into his decision to own Waste Management. A potentially undervalued company with a strong moat, a recession-resistant business model and a strong alignment with personal goals is a rare find for investors. In the case of Bill Gates and Waste Management, however, it appears that such a match may have existed.

Waste Management Profits & Sales Up

Waste Management had a relatively good year in 2022 in terms of both revenue and profits. Full-year revenue for 2022 totaled $19.7 billion, up from $17.9 billion in 2021. Net income, meanwhile, rose from $1.8 billion in 2021 to $2.2 billion in 2022.

Despite strong year-over-year growth, Waste Management did miss analyst expectations for its Q4 earnings. The company reported earnings of $1.30 per share, missing the consensus estimate of $1.39. Q4 represented the first and only miss of 2022, as Waste Management outperformed expectations during the first three quarters.

This year, Waste Management is projected to see its earnings grow 8.7 percent to $6.62 per share. Management also anticipates revenue growth of 4.5-5.5 percent in 2023. Over the next 3-5 years, the rate of earnings growth is expected to average roughly 8.75 percent.

Will WM Go Up?

Waste Management is expected to produce decent returns over the coming 12 months, with the consensus analysts’ price currently standing at $166.50.

Compared to the most recent price, this would represent a return of 11.6 percent. It’s also worth noting that Waste Management appears to be a relatively low-risk stock. All of the 16 analysts covering the stock expect it to rise this year, though the lowest price target puts the stock up just 1.1 percent.

In terms of value, Waste Management appears to be trading close to a fair price at the moment. The stock trades at just under 25 times expected earnings and about 3 times sales. One red flag that could suggest overvaluation is Waste Management’s price-to-earnings growth ratio (PEG), which is over 2.

Waste Management’s total returns are also augmented by its dividend. The stock currently yields 1.74 percent, and management has been steadily increasing the distributions over the past 20 years. Waste Management has seen particularly high dividend growth recently with a 3-year CAGR of 8.24 percent.

Is Debt a Worry?

Waste Management’s largest single risk is likely its debt load. At more than 2.1 times equity, the company’s debts appear quite concerning as interest rates continue to climb. Given the company’s long history and reliable revenue streams, however, its risk of defaulting on its debts is likely quite low.

Waste Management also suffers from low insider investment. Just 0.18 percent of the company is owned by insiders, creating the potential for misalignment between shareholders and management. This factor is partially offset by the high rate of institutional ownership, which stands at over 75 percent.

Is Waste Management Still a Buy?

Many of the positives that could have driven Bill Gates to buy Waste Management in the first place still hold true today. The company still enjoys a strong moat and the ability to thrive in markets that challenge many other businesses. Although the stock appears to trade fairly close to a fair value, it also doesn’t seem to be overpriced.

On the downside, Waste Management will likely have less room to run during a potential recovery than many other stocks. The company’s resilience to market conditions allows it to hold up in bear markets but may keep it from soaring in bull markets. As such, Waste Management may not be a good fit for investors seeking more aggressive growth.

Waste Management stock is likely a decent buy for investors looking for a combination of low-risk growth and dividend income. While the stock likely won’t spike when the market recovers, the risk of significant losses appears to be fairly low too. The company’s stable, growing dividend could also make it a good choice for long-term dividend growth investors and those looking for regular income from their portfolios.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.