Beginning around 2002 or so, Microsoft founder Bill Gates began to systematically liquidate his immense Microsoft fortune, selling as much Microsoft stock as he could each day without having a material impact on the stock price of the company that he founded. The proceeds of Gates’ stock sales poured into his investment holding vehicle, Cascade Investment Holdings, LLC, that has long been managed by Michael Larson.
Although Larson is believed to exercise considerable autonomy over the investment selections, I pay close attention to the investments that show Bill Gates’ thumbprints.
One such investment was Republic Services (RSG), the waste collection company, which Cascade purchased during the Great Depression for a price of under $20 per share. Larson gobbled up Republic Services stock like it was a tray full of Skittles, at one point giving Gates’ holding company a one-third stake in the entire business.
Why the trash industry? What did Gates see it waste hauling that others didn’t?
First, although Republic Services did not exist until 1998, the business model is so similar to that of Waste Management that one can look to Waste Management’s history to approximate the type of historical returns available in the sector. Although many don’t know this, Waste Management was the 12th best investment during the 1980s, turning every $1 invested into $21, i.e. to become a trash millionaire by January 1990, you needed to invest $47,000 into Waste Management stock in January 1980.
I am almost certain that Gates saw the track record of Waste Management and the parallel between the trash collection industry and Microsoft. Nearly all of Microsoft’s profits, especially in the early days, came from the subscription (and now licensing) income thrown off by the Microsoft office suite of products.
Every time someone starts a new business, has a kid go off to college, another Microsoft Office subscription is born. It is a near necessity in the commercial and academic worlds, and even those outside of these contexts sometimes get Microsoft office subscriptions as well. The recurrence of revenue as licenses were renewed and customers buy each iteration of the product explains how Microsoft rose to become a multi-billion dollar kingpin in tech.
Republic Services has a similar sphere of influence. It operates 192 landfills that generate income, and controls 333 subsidiaries that collect trash from residential areas. When a subdivision gets built, Republic Services may be there to add a subscriber to its trash collection services. When a property is sold and a new owner moves in and occupies the property, the service continues.
In 2003, Republic was earning $.89 per share. Today, it is earning over $3 per share while also rapidly growing its dividend payout at a rate of 13% annually over the same timeframe.
Incidentally, Cascade liquidated its position three years ago, likely for political reasons (Republic was receiving political pushback for a landfill that caught on fire in 2015, with critics pointing to Gates as somehow responsible on account of his large position. Gates chose to give into the heckler’s veto and sell his shares).
Of course, the obvious concern is: What happens when the market is saturated and there is no natural room for expansion? In that case, I imagine Republic could follow the lead of Wal-Mart in buying back massive blocks of stock. By 2000, Wal-Mart largely penetrated the world and few remaining avenues for growth. So the management team retired a third of the overall stock over the next fifteen years, giving earnings per share a nice kick. I imagine Republic Services could do the same thing. It helps that the valuation rarely gets outrageous–there have only been two years since the IPO in which the stock traded at a valuation in excess of 20x earnings–making it likely the market price of the stock would accommodate large-scale repurchases.
As such, Republic Services’ future looks largely promising. The dominance in its intended sphere, and recurrence of income, are remarkable similarities between Republic Services and Microsoft. I imagine that, over the coming decades, the trash collection and removal industry will continue to deliver double-digit returns. People will continue to produce trash, and someone will have to dispose of it. Brevity is the soul of investment success with this one.