KO - Coca-Cola Company

[loganc]

I am starting to get interested.  One thing I have noticed is that there seems to be a pretty large disconnect between the amount spent on share repurchases and the decrease in share count.  If I am correct, the price is going to have to go a lot lower before I seriously consider loading up.  Anyone have any thoughts on this issue?

[Palantir]

Sure they will drink, but will they drink Coke products? And if they do, will they have the same margins as Coke? The point I'm making is that Coke is a great business model, make a syrup out of cheap ingredients, sell it all around the world, and leave the bottling to the local bottling operations. Stable, strong margins, and pricing power. (It's like MS shipping out Windows to OEMs).

 

If demand drops though, whether it be for taste changes or health or regulatory, it will be more difficult for KO to replicate the above model with say juice. Bottled water will be a different business. Just IMO!

 

[hyten1]

i hear ya, i am no expert by any means

 

does KO have the highest margin in the drinking business? i guess what i am trying to get at is the liquid diabetes the best business in this space. i mean we all know anyone can do that (pepsi, etc.).

 

i believe its the combination of the brand, which i believe they have not been able to improve/extend that beyond liquid diabetes which is the problem.

 

i mean its not easy

 

the drinking space is actually very dynamic (you can argue, ko has lag due to not being creative/bold enough), look at all the things that is happening in this space (gmcr, soda, sbux, teas, water,  etc etc.)

 

hy

 

EDIT: i also think its the sign of the times, there are just A LOT more options/tastes. Its hard to have a few items that dominate. then again this only true until something that dominates comes a long.

 

 

 

Sure they will drink, but will they drink Coke products? And if they do, will they have the same margins as Coke? The point I'm making is that Coke is a great business model, make a syrup out of cheap ingredients, sell it all around the world, and leave the bottling to the local bottling operations. Stable, strong margins, and pricing power. (It's like MS shipping out Windows to OEMs).

 

If demand drops though, whether it be for taste changes or health or regulatory, it will be more difficult for KO to replicate the above model with say juice. Bottled water will be a different business. Just IMO!

[OracleofCarolina]

http://www.cnbc.com/id/101517496?__source=yahoo%257cfinance%257cheadline%257cheadline%257cstory&par=yahoo&doc=101517496%257cCoca-Cola+disputes+invest

 

David Winters is fed up with Coca-Cola's 2014 compensation plan

[Phaceliacapital]

It's a lot of money right, 14% dilution...

[bargainman]

http://www.cnbc.com/id/101517496?__source=yahoo%257cfinance%257cheadline%257cheadline%257cstory&par=yahoo&doc=101517496%257cCoca-Cola+disputes+invest

 

David Winters is fed up with Coca-Cola's 2014 compensation plan

 

I find it ironic coming from a guy who runs one of the highest charge mutual funds around.

[arbcon]

Not investment advice, but an alternate way of viewing this is that the current growth in intrinsic value per share is going to the management almost entirely.

[thepupil]

what am i missing?

 

https://www.bamsec.com/filing/130817914000049?cik=21344

 

Page 92

 

I see 331MM options/rights/warrants to be issued at a weighted average price of $29.42.

 

I see that as about 2.9B or so given to employees at current KO prices 330 * (38-29) =$2.9B, a modest ~2% dilution over the term of the plan, which is multiple years. The $13B number being thrown out is acting like Coke doesn't receive any cash when options are exercised

 

that's about $450K per the 6500 execs covered in the plan. I like coke executives owning a boatload of Coke. This seems pretty normal comp for top execs at big companies. 

 

Am I incorrect in my interpretation?

[tiddman]

Seems like a lot of compensation for a ham sandwich.

[Guest wellmont]

what am i missing?

 

https://www.bamsec.com/filing/130817914000049?cik=21344

 

Page 92

 

I see 331MM options/rights/warrants to be issued at a weighted average price of $29.42.

 

I see that as about 2.9B or so given to employees at current KO prices 330 * (38-29) =$2.9B, a modest ~2% dilution over the term of the plan, which is multiple years. The $13B number being thrown out is acting like Coke doesn't receive any cash when options are exercised

 

that's about $450K per the 6500 execs covered in the plan. I like coke executives owning a boatload of Coke. This seems pretty normal comp for top execs at big companies. 

 

Am I incorrect in my interpretation?

 

my understanding is buffett believes options work best for people who can affect change in intrinsic value on a corporation. that is a way shorter list than 6500.

[thepupil]

fair, but i'm trying to quantify the potential dilution and i don't think it is 14%. I think it is less. But I'm having trouble interpreting whether or not the new plan cancels out the old plan's options. 

 

KO also calculates the potential dilution and it is in the teens.

 

EDIT: In my opinion the dilution is significantly less than 14%, but I'd like to quantify it better. When I look at the 10-K, I see 305MM options outstanding w/ $3.6B of intrinsic value, which would dilute shareholders by 2% at current KO prices if all were exercised immediately. So that's the sum of all the previous plans. 2% dilution.

 

I see that about 55MM were granted last year at ~$38. I see nothing wrong with 50-60MM options / year if they are granted at the current stock price.

 

Or perhaps more accurately, I don't see a gigantic percentage of the increase in the intrinsic value of the company going to management. But David Winters is a lot smarter than I am and I want to understand if this year's plan varies much from the past or if it will be a continuation of the run rate options grants.

 

 

Current 60%/40%  

Mix of stock     mix of stock  

options/full value         100% stock     options and full   100% full value

awards   options   value awards   awards

Potential Dilution   16.8 %   14.2 %   10.0 %

 

 

 

 

[cubsfan]

6500 execs @ $450K each - makes them look like Goldman Sachs partners or Google.

 

Seems excessive to include that many executives.

[rpadebet]

I don't understand why Coca-cola executives need to be paid even an average amount. There needs to be a discount applied for being given the privilege of running a wonderful business. Honestly, the only reason they are being paid for is for not screwing up by introducing a "New Coke".

 

In really bad no moat  businesses too I wouldn't want to pay the executives a lot because the economics of the business usually overcome the skills of the manager .

 

On the other hand I would want to pay executives in average businesses, a lot above average because if they are good they can really impact the intrinsic value of those businesses.

 

 

[thepupil]

Maybe I'm doing something wrong or misinterpreting the plan, but I just made a little spreadsheet where I

 

1. Gave KO management the current 305MM options w/ weighted average strike of around 30. 

2. Increased KO price by 7% per year and granted last year's 55MM shares per year (grew the 55MM  options by 3% per year).

3. Since KO doesn't issue options at a discount, i moved my strike price each year by 7%.

4. I calculated the "value given to management" over time and I get about $4.8B over 10 years,

 

If KO goes up by 7% per year shareholders in aggregate will make $150B in capital appreciation, so shareholders lost out on 4.8B of that, 3% or so. If i increase price by 4% per annum I see managment making just under $4B and shareholders making $74B

 

My scenario likely understates the impact of incentive plan dilution. I just think David Winters and the media are overstating the value that KO management is sucking from shareholders. This seems like par for the course for corporate America (whether it is right or wrong, i'll leave up to debate)

 

Regardless of whether it is right or wrong or deserved, i'm curious if this is impacting anyone's view of KO as an investment.

 

For me it does not (I don't own KO, but some family members do and i own berkshire so it is of interest to me). KO has grown per share intrinsic value with a seemingly similar plan in place. I don't think it is material, new, or changes anything about the likely success/failure of being long KO. 

 

EDIT: I improved the spreadsheet by adding a lag to the strike price granted of 5 years appreciation (i.e. year 5's strike price is close to year 0's market price) so that it accounts for the time value of options given to management and the lag between grant and exercise which hurts since shares have to be repurchased in the future at presumably higher prices.

 

This brings the total management take to 14.4B w/ 7% price appreciation (so shareholders: 85% , management: 15% ). With 4% price apprecitation, management steals about 9.5% of increase in value over 10 years.

 

Winters is winning me over. Very rough spreadsheet attached.

KO.xlsx

[loganc]

Maybe I'm doing something wrong or misinterpreting the plan, but I just made a little spreadsheet where I

 

1. Gave KO management the current 305MM options w/ weighted average strike of around 30. 

2. Increased KO price by 7% per year and granted last year's 55MM shares per year (grew the 55MM  options by 3% per year).

3. Since KO doesn't issue options at a discount, i moved my strike price each year by 7%.

4. I calculated the "value given to management" over time and I get about $4.8B over 10 years,

 

If KO goes up by 7% per year shareholders in aggregate will make $150B in capital appreciation, so shareholders lost out on 4.8B of that, 3% or so. If i increase price by 4% per annum I see managment making just under $4B and shareholders making $74B

 

My scenario likely understates the impact of incentive plan dilution. I just think David Winters and the media are overstating the value that KO management is sucking from shareholders. This seems like par for the course for corporate America (whether it is right or wrong, i'll leave up to debate)

 

Regardless of whether it is right or wrong or deserved, i'm curious if this is impacting anyone's view of KO as an investment.

 

For me it does not (I don't own KO, but some family members do and i own berkshire so it is of interest to me). KO has grown per share intrinsic value with a seemingly similar plan in place. I don't think it is material, new, or changes anything about the likely success/failure of being long KO. 

 

EDIT: I improved the spreadsheet by adding a lag to the strike price granted of 5 years appreciation (i.e. year 5's strike price is close to year 0's market price) so that it accounts for the time value of options given to management and the lag between grant and exercise which hurts since shares have to be repurchased in the future at presumably higher prices.

 

This brings the total management take to 14.4B w/ 7% price appreciation (so shareholders: 85% , management: 15% ). With 4% price apprecitation, management steals about 9.5% of increase in value over 10 years.

 

Winters is winning me over. Very rough spreadsheet attached.

 

You may be correct that Winters is overstating the dilution but it still has an impact on how I view the company.  As I noted before in the thread, I noticed that there is a substantial disconnect between the amount of capital that is ostensibly being returned to shareholders via the buyback and the actual reduction in share count.  It seems as though the disconnect will be widened even more substantially by the 2014 plan. 

 

To my mind, the disconnect between the actual share count reduction and the amount spent on share repurchase (net of cash gained from issuance via the plan) is effectively maintenance capex.  Therefore, such activity effectively makes the companies much more expensive on a multiple of FCF by my analysis. 

[thepupil]

Logan do you agree with the below? I view it differently than when i started and applaud Winters for trying to slow this down. I'm trying to understand your thought process. Let's take 2013.

 

http://www.gurufocus.com/financials/KO

 

So using the old gurufocus 10 yr financials, I see free cash flow of $7.9B  (4.7% FCF yield on $170B MCap)

 

Of that $7.9B, $4.9B went straight into shareholders pockets in the form of cash dividends (62%), no issues there.

 

In 2013, KO spent $4.8B on repurchases, but $1.3B of that came from proceeds of options exercise for a net $3.5B of cash used on repurchases. So a casual observer might say over 100% of FCF (4.9+3.5 > 7.9) is going to shareholders which is great. But....

 

KO bought 121MM shares for $39.84 per share

 

"In 2013, we repurchased $4.8 billion of our stock. The net impact of the Company's treasury stock issuance and purchase activities in 2013 resulted in a net cash outflow of $3.5 billion."

 

During 2013, 53MM options were exercised at a weighted average strike of $25.00 / share.  So 53*25= the $1.3B of cash received from exercise, but they had to use $2B of cash to cancel those 53MM shares.

 

So if those options did not exist, they would not have received the 1.3B, but they would not have had to pay 2.0B to get rid of the shares, so shareholders lost $700MM net, which is about 20% of the net share repurchases, 8.8% of Free cash flow, 8.2% of earnings,  etc.

 

So deducting the net outflow from the options stuff you get "adjusted free cash flow" of 7.9-0.7=7.2 /170 = 4.2% yield vs the original 4.7%. I know free cash flow didn't actually change, but you are saying that a portion of FCF went to management and not shareholders so you adjust it down, right?

 

Is that how you are thinking about it?

 

Also how do we reconcile the $700MM of "value given to management" via options vs. stock comp expense below. I define "value given" as the difference between the strike and the repurchases, ie the incremental dollars it takes to keep share count steady. Is it because of timing issues?

 

This helped with that :

 

http://en.m.wikipedia.org/wiki/Stock_option_expensing

 

Total stock-based compensation expense was $227 million, $259 million and $354 million in 2013, 2012 and 2011, respectively, and was included as a component of selling, general and administrative expenses in our consolidated statements of income. The total income tax benefit recognized in our consolidated statements of income related to stock-based compensation arrangements was $62 million, $72 million and $99 million in 2013, 2012 and 2011, respectively.

 

 

[xtreeq]

Wintergreen Advisers, LLC Expresses Disappointment with Coca-Cola’s Proposed 2014 Equity Plan

http://www.businesswire.com/news/home/20140321005785/en/Wintergreen-Advisers-LLC-Expresses-Disappointment-Coca-Cola%E2%80%99s-Proposed#.UzLL5PmSyT8

 

[fareastwarriors]

Diet Coke may take the pop out of Coca-Cola shares

 

 

 

http://www.cnbc.com/id/101531665

[OracleofCarolina]

http://www.sec.gov/Archives/edgar/data/21344/000130817914000116/lcocacola2014_defa14a.htm

 

KO's response to David Winters...

[loganc]

http://www.sec.gov/Archives/edgar/data/21344/000130817914000116/lcocacola2014_defa14a.htm

 

KO's response to David Winters...

 

I think their response is bullshit and condescending in the worst way.  I can do very simple math and find that 1.5B is getting collected by KO management, absent the 2014 plan. 

[loganc]

@thepupil I am sorry for the delay in response.  I think you have done some good work but I have yet to find the time to respond appropriately to your thinking.

 

Ultimately, I am getting really distracted by KO's response.  It is so ridiculously condescending. 

 

 

[Zorrofan]

http://www.sec.gov/Archives/edgar/data/21344/000130817914000116/lcocacola2014_defa14a.htm

 

KO's response to David Winters...

 

I think their response is bullshit and condescending in the worst way.  I can do very simple math and find that 1.5B is getting collected by KO management, absent the 2014 plan.

 

What I do not understand is why WEB doesn't speak out against this - he has more "skin in the game" than most and if he spoke against the plan it would likely be "adjusted".

 

cheers

Zorro

[Rabbitisrich]

Strange response indeed. If the board paid management with cash today and required that management enter into forward contracts to purchase stock, then you would have similar dilution, assuming the performance targets are reached. So how does a buyback/dividend plan mitigate such dilution? Maybe the BOD misrepresented their views, but the response reads like they confuse a stable number of shares outstanding with a neutral economic impact to shareholders.

 

 

[adesigar]

A Warren Buffett quote seeps apt here

 

Passion is the number one thing that I look for in a manager. IQ is not really that important. They need to be able to work well with others and the ability to get people to do what you want them to do. I’d say intelligence, energy, integrity. If you don’t have the last one, the first two will kill you. All you have is a crook who works hard and finds lots of clever ways to make all your money theirs. If a person doesn’t have integrity, you want them dumb and lazy.

[Munger_Disciple]

From 2013 10-K, it appears that the company has been granting approximately 60M (10-year) options and 7.5M stock grants per year to management. Assuming that 1 option is worth 0.4-0.5 shares, the dilution per year comes to less than 40M shares, which is approximately slightly under 1%. I think 1% is still too much compensation as it is worth $1.6B per year to management.

 

Winters made the mistake of assuming that 1 option is worth 1 share and he also did not try to figure out annual issuance rate. Having said that, I think company's response to his criticism is really weak.