Wintergreen Advisers today released the following letter, which was sent
to clients and friends of the firm regarding the Coca-Cola Company
(NYSE:KO).
To our Clients and Friends:
When the Coca-Cola Company on October 1, 2014 announced the adoption of
Equity Stewardship Guidelines for the company’s existing 2014 Equity
Compensation Plan, we were cautiously optimistic that Coca-Cola’s Board
of Directors had made changes to the Plan to address the concerns
expressed by Wintergreen Advisers and certain Coca-Cola shareholders.
But after looking closely at the Guidelines and studying Coca-Cola’s
public statements, we’ve concluded that there has been no significant
change. In fact, we believe the Guidelines could actually make the Plan
worse for Coca-Cola shareholders. Under the Guidelines, certain top
Coca-Cola managers will be paid in cash instead of stock which could
potentially put the company’s dividend at risk.
Still a Wildly Excessive Plan
When Coca-Cola announced the adoption of the Guidelines, the head of
Coca-Cola’s Compensation Committee said that “we are not changing or
reducing eligibility for long-term awards.” The Guidelines simply call
for top management to receive fewer stock options and much more cash and
full-value equity awards than they might otherwise have received under
the Plan as originally conceived. Coca-Cola’s Guidelines do not
reduce by one cent the amount that will be paid out of shareholders’
pockets to the top 5% of management who are eligible for the Plan.
When it was up for shareholder approval, the Plan was criticized for
being excessive and oversized, and the Guidelines have done nothing to
rein in its excessiveness or reduce its size. Management remains
eligible for “bonus shares” that can be awarded without criteria. There
still is no cap on total stock awards to any individual. We believe the
Plan remains wildly excessive.
Coca-Cola’s Board of Directors seems to be attempting to distract
shareholders by issuing Guidelines that appear to address the problems
with the Plan, but which in reality do nothing at all. Coca-Cola is
simply reshuffling the deck and shareholders are still getting a bad
deal.
Creating New Problems for Shareholders
In our view, the Guidelines not only fail to address the original
problems with the Plan, but they raise problems of their own. To meet
the Guidelines, Coca-Cola will massively increase the amount of cash
compensation handed out to top management over the next 10 years in
addition to shares and options issued under the Plan. The result for
Coca-Cola shareholders will be both dilution (from the shares and
options issued) and reduced earnings (from the increased cash
compensation expense). We believe the excessive Plan and the
appalling Guidelines are a lose-lose situation for all Coca-Cola
shareholders.
By our estimate, it appears that the cash compensation required to meet
the Guidelines will cost shareholders between $1 billion and $3 billion
per year in excessive management compensation. That is cash that comes
directly out of shareholders’ pockets and reduces Coca-Cola’s earnings
by a proportionate amount. After taxes, that $1 billion to $3 billion
per year is worth between $0.17 and $0.51 in annual per share net
income, assuming a 25% corporate tax rate. At Coca-Cola’s
current valuation of 20x earnings, that excessive cash compensation
costs shareholders between $3.40 and $10.20 of per share value.
Putting the Dividend at Risk
Coca-Cola recently lowered its earnings outlook and Chairman and CEO
Muhtar Kent acknowledged that it “will take time to implement and
deliver improvement in our results.” But any improvement in Coca-Cola’s
performance will be impeded by the negative effect of what we view as
the excessive dilution and massive cash payouts that will be made to
management, both of which impact Coca-Cola’s ability to grow earnings
per share. If Coca-Cola is unable to grow earnings per share, the
dividend growth that shareholders have come to expect after 50
consecutive years of increases will be put at risk.
Coca-Cola’s dividend coverage ratio currently stands at only 1.6x,
before considering the negative impact of increased cash compensation to
the top 5% of management. We believe it is incredibly imprudent behavior
by the Board of Directors to put shareholders’ dividends at risk in
order to increase compensation to what we view as an already overpaid
management team.
It is the fiduciary responsibility of all Board members to put the
shareholders’ interests ahead of those of management. It is becoming
apparent to us that the current Board is not meeting that
responsibility. If this Board cannot take steps to restore trust and
revitalize the company, it should be replaced.
Sincerely,
David J. Winters, CFA
CEO
Wintergreen Advisers, LLC
Copyright Business Wire 2014