The whole “activist shareholder” thing is in the news again. David Winters, CEO of Wintergreen Advisors, has gone (very) public with concerns about the board of Coca-Cola (KO). In many ways, however, Winters’ complaints are more legitimate than some that have come before. He is not advocating for enormous payouts to existing shareholders such as his company, nor is he suggesting any major purchase or sale. What originally drew Winters’ ire was the Coke board’s plan to reward directors with a reported $13 Billion worth of stock. Some, however, such as Tim Ferholz, in this Quartz article, have concluded that that number is unrealistic.
This analysis looks more accurate to me and would leave the performance based compensation at a maximum of $5 Billion spread over four years and between over six thousand employees. Winters, using his $13 Billion number and assuming that the majority of the payout would fall to board members, has called the plan “disappointing, defensive and inadequate” and an “excessive transfer of wealth” from shareholders to executives. In the current climate of excessive compensation for senior managers he has found many sympathetic ears and has gone on to question the dual role of Muhtar Kent as Chairman and CEO at Coke.
It looks quite possible that some flawed analysis led to an over-inflated number, but Mr. Winter’s reaction was understandable. He was simply acting in the way he should, both as a shareholder and fund manager. Questioning the board’s decisions is the correct thing to do in both roles, but doubling down as more details emerge may not be the most constructive approach going forward. This has the makings of a long battle that could easily become personal and more to do with pride than practicality, a la Herbalife (HLF).
With all of that said, the question, as ever, is does any of this make KO a buy or should investors stay clear.
In some ways, in a market where many things look at least fully valued, KO is the type of stock that investors are drawn to. If the compensation battle and the title(s) given to Kent were the cause of the share price’s underperformance then I would say to take advantage of the weakness. The problem is that it isn’t.
The stock’s fall is more to do with three successive quarters of uninspiring results and downward revisions with a backdrop of falling sales for soda in the developed world. Just a couple of days ago it was revealed that soda consumption in the US is declining at an increasing rate. This has led many to conclude that we are witnessing a complete culture change, rather than a trend. There may be some validity to this, and if so, I and my generation of parents are probably to blame. We have all brought up our teenagers to consume less sweet fizzy stuff than we did. This sounds like a good thing, especially given recent concerns about health risks from diet soda as well as the fully sugared ones, but the rise in popularity of energy drinks would suggest that we may have just shifted the problem. Such is the lot of parents of teenagers!
Coke and their main rival Pepsi (PEP) have countered this shift with diversification, so will survive the trend, or even culture changes. In the long term, however, what troubles me is that, despite continued growth in the world’s population, KO and PEP may have both hit a point where robust growth is a thing of the past. Simple logic tells us that, with the kind of reach and brand recognition that Coke has, anybody who wants to drink their iconic drink and can afford it already does. Without a dramatic shift in the distribution of wealth around the world there comes a point at which sales growth must slow. We could be at that point.
The aforementioned diversification could provide the answer, but to buy the stock on that hope would demand that it be cheap. In an industry that is heavily covered, resulting in three quarters of EPS that exactly met expectations, and with a forward P/E of close to 18, Coke, however, looks anything but cheap.
KO is the kind of stock that people buy and hold as a defensive, dividend paying play on global economic growth, and I guess if that is your aim, then it still serves that purpose. Bear in mind, though, that if US interest rates continue to rise, then the 3.18% yield that Coke offers becomes less attractive, putting further pressure on the share price.
If this fight between Winters and Kent drags on and the resulting mudslinging drags the stock even lower, then KO could become attractive. Without that, though, it seems that, based on fundamentals and outlook, rather than the compensation plan and role of the CEO, the stock is at best fairly valued and is best left alone.