There has been much talk lately about Coca-Cola and its potential as a value stock – as it now spots a dividend yield of 2.6% (which is
highest dividend yield since late 1980s) and a P/E or less than 21 – right at bottom of its five-year low. Moreover, current price of approximately $43 a share is also near bottom of its nine-year range – (nine years ago, last former great CEO of Coke, Roberto Goizueta, was still at helm of company). Sure, Coke has had its own set of problems, but it is a great company, they would argue – and heck, Warren Buffett is also an owner of Coke shares.
Don’t get me wrong. I really like Coke as a company. Its brand is as American as can be, and yet over 70% of all its sales are derived from outside of North America. The country with highest consumption per capita of Coca-Cola is Mexico. According to Interbrand.com, brand name of Coca-Cola is worth approximately $67 billion and is world’s number one brand name. Who could forget famous declaration of Coke’s patriarch, Robert Woodruff? When United States made decision to enter World War II, he placed his hand on his heart and famously declared that he would “see that every man in uniform gets a bottle of Coca-Cola for five cents wherever he is and whatever it costs.” Of course, it didn’t hurt that Woodruff’s friend, General Dwight Eisenhower, was a great promoter of Coke as well. By time war ended, hundreds of thousands of fighting men and women became a fan of Coca-Cola for rest of their lives.
Under leadership of Goizueta, Don Keough, and Doug Ivester, Coca-Cola emerged as a growth and must-own stock during late 1980s and up to mid to late 1990s. Keough was great motivational speaker, while Goizueta was unmatched in his ability to “manage” stock price and Wall Street analysts who covered non-alcoholic beverage industry and Coca-Cola. Goizueta had a habit of watching stock price of Coca-Cola on an intraday basis on a computer in Coke’s headquarters. When Warren Buffett was buying shares of Coca-Cola back in 1988, he and Keough figured it out by watching action of trading and tracing those purchases to a broker based in Omaha. Ivester, a former accountant, could have been regarded as a great financial alchemist. Under financial leadership of Ivester, Coca-Cola bought out many of its bottlers and named entity as Coca-Cola Enterprises. The bottler went public in November 1986.
When Coca-Cola Enterprises (CCE) went public, Coca-Cola (the company) owned 49% of its outstanding shares. Because of this, Coca-Cola had ability to raise syrup prices at will (the former agreement mandated that Coca-Cola only adjusted its price to match inflation for its syrup in North American market) – thus squeezing profit margins of bottler but increasing its own revenues and profits. The stroke of genius was this: Because of fact that Coca-Cola only owned 49% of CCE, it did not have to consolidate any of its financial statements with CCE. At time, not one single analyst totally understood this relationship. Year-after-year, company delivered. Goizueta carefully (personally) managed all information that came out of Coca-Cola. He would personally call Wall Street analysts. Any analyst that dared to question him openly or disagree with Coca-Cola’s earnings projections would be rebuffed. One such analyst was Allan Kaplan from Merrill Lynch, who at one point wrote a note to his clients observing that Coca-Cola may be depending on Japan for too much of its profits. When Goizueta found out about note, he responded angrily with letters to both Kaplan and his bosses at Merrill Lynch. Kaplan was banned from attending analyst meetings at Coca-Cola for more than a year. From that point on, analysts knew not to mess with Goizueta and Coca-Cola.
Keough officially retired in 1993 while Goizueta passed away in October 1997 – succumbing to lung cancer. Ivester succeeded as CEO but behind scenes, company was in disarrays. People loyal to Keough and to Ivester clashed – with former group bearing brunt of hardship. The current CEO, Neville Isdell (who was loyal to Keough and only true competitor for top job back then) was sent into “exile” to Great Britain to head up a bottler. According to a recent Fortune article, “The biggest problem [with Ivester], though, was his tin ear. Ivester was high in IQ but terribly short on EQ. A self-made, stubborn, very shy son of North Georgia millworkers, he had gotten where he was through brains and hard work. He resented Keough's grandstanding, say people who knew him well, and never fully appreciated importance of Goizueta's almost daily chats with directors. (Ivester declined to comment.) Before long, head-down and full tilt in a turbulent market, Ivester had alienated European regulators, executives at big customers like Wal-Mart and Disney, and some big bottlers, including Coca-Cola Enterprises (on whose board sat Warren Buffett's son Howard). As he raced to put out fires, he became increasingly isolated from his own board of directors. One person was keeping in touch with them, though, even in his retirement—Don Keough.”
