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Summary

  • KO's equity compensation plan is extremely dilutive, even by more conservative estimates.
  • Wintergreen's estimates are much higher than those of Brooklyn Investor, but regardless of who is correct, management is winning at the expense of shareholders.
  • Buffett, in failing to vote against a plan he called "excessive," has failed KO shareholders and allowed management to run wild with unchecked equity compensation.

Over the past few weeks, Coca-Cola (NYSE:KO) has been the subject of a very public outcry over its executive compensation plan. Specifically, the equity piece of it, which is huge, has drawn the criticism of Wintergreen Advisors, a large shareholder with 2.5 million shares. While that doesn't make Wintergreen a large percentage shareholder, it should make investors notice when they speak. And notice they did when Wintergreen went public with its distaste over Coke's equity dilution to pay executives.

While I am not one who complains about paying good managers, I do find the plan Coke laid out (and was recently passed at the shareholder meeting) to be excessive. I am a firm believer that if you want to attract and retain top talent, you've got to pay for it. If Muhtar Kent wanted to go somewhere else, there are dozens of companies that would likely want him, and the only way Coke keeps him and other executives happy is to pay them what they're worth. I have no issues with this until it results in enormous dilution for shareholders.

Now, before we go any further, it should be noted that not everyone agrees on Wintergreen's dilution math. Brooklyn Investor has an interesting piece regarding his take on the equity plan which, even if his more conservative math is true, still results in a very high amount of dilution. Whether Wintergreen or Brooklyn are correct is really here nor there; the point is that the plan is very generous to management at the expense of shareholders. Again, I've got no problem with paying management, but massive dilution is an issue all its own, because we are all picking up the tab via lower EPS, dividend yield and share price appreciation.

Now, where this story gets interesting is the shareholder vote that took place recently. Coke shareholders approved the company's pay plan by an 83% majority, signaling to management that all is well. Where I take issue with this is with one Warren Buffett. We all know Buffett is a conservative dividend investor, perfect for Coke's style, and that he is a no-nonsense Midwesterner. And owning 400 million shares of Coke stock makes him the voice of shareholders to management, as he's always got their ear if he wants it. That's why I was surprised and disappointed that he let shareholders down when he failed to vote against the proposed plan at the shareholder meeting. While his <10% stake wouldn't have made an actual difference in the outcome of the vote, it would have been valuable nonetheless as a very powerful symbolic gesture to management; the bottom line is, I think Buffett failed Coke shareholders.

In calling the plan "excessive," I had hoped Buffett would stand up for shareholders and at least make a symbolic gesture to management in voting against the plan. However, he didn't want to rock the boat for some reason, and decided not to vote instead. Nobody cares if I vote my shares a certain way, because I own a meaningless stake in Coke, but if Buffett had taken the reins, management would have taken notice and likely taken some action to reduce the size of the planned dilution.

Whether Brooklyn or Wintergreen's dilution math is correct is really immaterial to this discussion; the fact is that Coke's equity plan is far too expensive for shareholders, and while I believe in pay for performance, Coke's plan is too heavily skewed towards existing shareholder dilution. Buffett understands this, and I was therefore disappointed when he refused to do anything about it at the shareholder meeting. Buffett failed us as shareholders, and in fact, he failed himself, because he will be the single largest holder that is affected by the planned dilution. Maybe next year, someone will actually put the brakes on this ridiculous dilution for management's sake.

Disclosure: I am long KO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: How Warren Buffett Failed Coca-Cola Shareholders... And Himself