As investors continue to prepare to cast their proxy ballots ahead of
the Coca-Cola Company (NYSE:KO) annual shareholders’ meeting on April
23, David Winters, CEO of Wintergreen Advisers, sent a second letter to
Coca-Cola’s largest shareholder, Warren Buffett, CEO of Berkshire
Hathaway (NYSE:BRK.B).
Winters wrote, “We do not believe it would be consistent with
Berkshire’s long ingrained culture to support such a plan at any of your
equity holdings, much less one worth nearly $16 billion. If the proposed
2014 Coca Cola Equity Plan were to be approved by its shareholders, the
implication for investment returns in our country may be devastating.”
The full text of the letter is included below.
Wintergreen Advisers, LLC Letter to Warren Buffett
Warren E. Buffett
Berkshire Hathaway Inc.
3555 Farnam St.
Omaha,
NE 68131
April 16, 2014
Dear Warren,
Over the years your conviction and passion for corporate diligence and
responsibility has echoed through the American consciousness. Like
Jiminy Cricket you sit on our shoulders reminding us to do what is
right. Work hard, be fair, save for our future, stand up for what is
right, and think like an owner. Now the United States and investors are
at a crossroads. People of all political persuasions recognize the
enormous disparity in financial wealth between the vast majority of
Americans and the very top ranks of the corporate elite.
Millions of investors depend upon Coca-Cola as a staple in their
financial security planning. Some invest directly in Coca-Cola, others
invest in index or actively managed equity funds, and some invest
indirectly through the investment vehicle most near and dear to your
heart, Berkshire Hathaway. Whether in the initial formative years of
saving, in the midst of their careers or in the payout period of a
well-deserved retirement, there are millions of people who worked hard
for their money and believed the promise that their money would work
hard for them.
Later this month at the company’s annual meeting, shareholders will vote
to determine whether they will transfer a meaningful portion of
Coca-Cola’s intrinsic value from the shareholders to the top five
percent of the company’s employees. The proposed equity plan, when
combined with existing plans, could dilute all Coca-Cola shareholders by
taking up to 16.6% of the value of each share, worth $6.67 per Coca-Cola
share at last night’s closing price of $40.18, and handing it to the top
5% of Coke management. If Coke uses the share repurchase program to
offset the issuance of these shares as they have done in recent years,
shareholders will be further damaged. The company may have to divert
approximately $2 billion per year (one-quarter of its free cash flow)
from productive uses to offsetting dilution. To a business with a 27%
return on equity, the opportunity cost of spending $2 billion per year
to offset dilution is enormous.
As you stated in your 2013 letter to Berkshire shareholders,
Meanwhile, stock repurchases at Coca-Cola and American Express raised
our percentage ownership. Our equity in Coca-Cola grew from 8.9% to
9.1%...And, if you think tenths of a percent aren’t important, ponder
this math: For the four companies in aggregate, each increase of
one-tenth of a percent in our share of their equity raises Berkshire’s
share of their annual earnings by $50 million.
Coca-Cola repurchased 121 million shares in 2013, but turned around and
issued 54 million shares and options to management, reducing the share
count by only 67 million shares. Now realize that if Coca-Cola hadn’t
issued those 54 million shares to executives, Berkshire’s ownership of
Coca-Cola would now be 9.2% instead of 9.1% and Berkshire’s share of
Coca-Cola’s earnings would be $10 million larger. We agree with you -
one tenth of a percent IS a big deal to Berkshire! With the proposed
2014 Equity Plan potentially issuing more shares in fewer years than
previous equity compensation plans, this dilution headwind to Berkshire
and all Coca-Cola shareholders will likely only grow worse.
In the 52 years you have been Chairman and CEO, you have not implemented
such a dilutive compensation plan at Berkshire Hathaway, and it is
unthinkable that you ever will. We do not believe it would be consistent
with Berkshire’s long ingrained culture to support such a plan at any of
your equity holdings, much less one worth nearly $16 billion. If the
proposed 2014 Coca Cola Equity Plan were to be approved by its
shareholders, the implication for investment returns in our country may
be devastating.
We believe that approval of the proposed Coca-Cola plan will harm the
returns of all Coca-Cola shareholders, including Berkshire. If the
proposed plan becomes the model for subsidiaries within Berkshire, the
financial returns for all Berkshire shareholders would be dramatically
diminished. Similar plans implemented by more companies in the S&P 500
Index could starve index fund owners of their expected returns.
Investors who vote for these excessively dilutive plans risk becoming
enablers in the spiral of ever-higher executive pay.
With enough shares remaining under existing plans to function well for
another year, Coca-Cola does not need a new plan at this time.
Coca-Cola’s board of directors should take the time to rethink and
refine the proposed equity plan in a manner that will be fair and
reasonable from the perspective of both shareholders and employees.
We believe that Coca-Cola’s proposed 2014 Equity Plan is bad for
Berkshire Hathaway, bad for Coca-Cola, and bad for the investment
outlook for U.S. companies. This is a moment in time when America again
looks to you to continue to stand up for what is best for our
corporations and our country, just as you have talked about and done for
decades. Coca-Cola and Berkshire shareholders, and in reality all of
America, are counting on you to demand that shareholders be treated as
partners instead of piggy banks. This is an opportunity to champion the
true owners of American businesses – the shareholders.
Regards,
David J. Winters, CEO
Wintergreen Advisers, LLC
973-263-4500
THIS IS NOT A SOLICITATION OF DIRECT OR INDIRECT AUTHORITY TO VOTE YOUR
PROXY. PLEASE DO NOT SEND US YOUR PROXY CARD; WINTERGREEN ADVISERS, LLC
AND ITS AFFILIATES ARE NOT ABLE TO VOTE YOUR PROXIES AND THIS
COMMUNICATION DOES NOT CONTEMPLATE SUCH AN EVENT.
THIS LETTER INCLUDES INFORMATION BASED ON DATA FOUND IN FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION, INDEPENDENT INDUSTRY PUBLICATIONS
AND OTHER SOURCES. ALTHOUGH WE BELIEVE THAT THE DATA ARE RELIABLE, WE
HAVE NOT SOUGHT, NOR HAVE WE RECEIVED, PERMISSION FROM ANY THIRD-PARTY
TO INCLUDE THEIR INFORMATION IN THIS LETTER. MANY OF THE STATEMENTS IN
THIS LETTER REFLECT OUR SUBJECTIVE BELIEF.
THE INFORMATION CONTAINED HEREIN IS NOT AND SHOULD NOT BE CONSTRUED AS
INVESTMENT ADVICE, AND DOES NOT PURPORT TO BE AND DOES NOT EXPRESS ANY
OPINION AS TO THE PRICE AT WHICH THE SECURITIES OF THE COCA-COLA COMPANY
MAY TRADE AT ANY TIME. THE INFORMATION AND OPINIONS PROVIDED HEREIN
SHOULD NOT BE TAKEN AS SPECIFIC ADVICE ON THE MERITS OF ANY INVESTMENT
DECISION. INVESTORS SHOULD MAKE THEIR OWN DECISIONS REGARDING THE
COCA-COLA COMPANY AND ITS PROSPECTS BASED ON SUCH INVESTORS’ OWN REVIEW
OF PUBLICLY AVAILABLE INFORMATION AND SHOULD NOT RELY ON THE INFORMATION
CONTAINED HEREIN. NEITHER WINTERGREEN ADVISERS, LLC, NOR ANY OF ITS
AFFILIATES ACCEPTS ANY LIABILITY WHATSOEVER FOR ANY DIRECT OR
CONSEQUENTIAL LOSS HOWSOEVER ARISING, DIRECTLY OR INDIRECTLY, FROM ANY
USE OF THE INFORMATION CONTAINED HEREIN.
Copyright Business Wire 2014