Month: August 2019

The Coca-Cola Company has been producing growing earnings for the shareholders consistently over the past decades. Not only has the earnings been growing over the last 30 years since Warren Buffet’s Berkshire Hathaway bought its ownership in 1989, but for a long time before that too. The wonderful company of Coca-Cola was founded in 1886, and it’s been growing its dividends annually for over 50 years. The yearly growth rate has been quite decent, about six percent, outpacing inflation by a good margin.

If you were an owner, shareholder, of The Coca-Cola Company, you would be entitled to a part of the earnings that the company produces for its shareholders.

How it works is that board of the company suggests how much of the earnings be paid out as a dividend, and the shareholders vote upon it in the general assembly. The part of the earnings that the company does not pay out as a dividend remains in the business as capital, which can be used to grow the business and the earnings even more.

Historically the company has retained a major part of its earnings and used the capital for further growth, as well as share buybacks. Yet it has been able to grow its dividends every year.

We’ll cover share buybacks in a later post.

If you were looking for a wonderful company to invest in back in 2009 after the crash, you might have come across Disney. It was then trading at a price which gave investors a dividend yield of not more than about 1%. Keeping in mind that the current dividend yield and the future earning power of a business are not the same, you went ahead and bought a share of ownership in the company.

Let’s say you shared the Warren Buffett idea of having your holding period to be forever and did not sell a share. You’d be happy to see dividends continue increasing for the next ten years. Today your dividend yield would be about five times higher, from about 1 to 5 percent.

What the dividends do not tell is that Disney has retained most of its earnings and compounded them over your holding period. The earning power of each share has also gone up by about fivefold. Your earnings yield on your investment price, not adjusting for dividends, is now more than 28%. It was only about 5% when you bought the shares, but since you bought into a wonderful company at a fair price you did well!

Indeed you can! At least in a way.

You see, if you own shares in The Coca-Cola Company, in the KO stock listed on NYSE, you are a part owner of the business and you are entitled to its earnings. At least in relation to your ownership stake in the company.

It’s no surprise that the company has been earning lots of money every year for a long time. Part of the earnings have been reinvested in the company for further growth or share buybacks, the rest has been paid out as a dividend for its shareholders. That’s where you come in!

You can be an owner of The Coca-Cola Company because it is a public company. At least you can be a part owner. However large or small, each shareholder is treated equal in terms of ownership benefits per share.

Free Cokes you said? How?

We’ll they’re not really free, but if you were an owner of the business, you would earn dividends, and the dividends could cover your Coke consumption for a lifetime. That is to say if you have enough shares in relation to your consumption.

If you’re a US citizen a Coke serving of 16 oz costs about $1.20. Depending on your tax situation you’d need to have an incoming share income, dividend, of a bit more than that. Let’s say $1.50 of dividend income should be enough to be able to buy one serving of Coke.

The Coca-Cola Company pays a quarterly dividend of 40 cents per share and growing. That means one share currently pays you an annual dividend of $1.60, enough to cover the cost of a Coke after tax, and perhaps it also leaves you with some pocket change too!

I’m a big fan of the company (why else would I be blogging about it). Not only am I a consumer of its products, but I’m a part owner of the business too. I like to see that my ownership is big enough to cover my consumption of the products that I love. It’s not there yet, but it can be, and it could for you too.

Imagine having “free” Cokes for a lifetime consumption. You can build your Coke Earning Power over time, by gradually acquiring shares. And once you have enough ownership to cover your consumption, it doesn’t end there. It can be passed on. Your grandchildren can enjoy free Cokes as well. A form of generational wealth!

Let’s say you bought an ownership stake in The Coca-Cola Company ten years ago, and you somehow managed to get your shares at a price equal to book value; you got the shares without paying a premium in other words. That would be far below what the shares traded for, but think of this as a thought experiment. Then let’s say for some reason the stock market was shut down right after you bought your shares, and it still is. How might you think of the outcome of your investment so far?

Since the stock market it closed, and you are not getting any information about what the stock is selling for, you turn to the business figures for an answer.

The last ten years you have collected a dividend well over twice of what you paid. And the dividend has grown by about 6.6% yearly. Your earning power from dividends has made you richer by the year, outpacing inflation. Your current dividend yield on your initial investment has climbed from about 15% to nearly 30%. Over the period your equity per share has decreased somewhat with about 80% remaining. Your equity capital in the business is now lower than what it was when you invested.

In the perspective of earnings on equity, which would be the earnings yield on the amount of capital you have in the business, you’d be glad to know that you have gotten a pretty good average annual return of about 27%.

Would you consider to be invested in a good business? Warren Buffett would certainly say so. For him a wonderful business is a company that manages to earn a yearly return of at least 20% on tangible equity capital. We’ll come back to what that means later.

The point of this post and more posts to come is to address what it means to be invested in a wonderful company versus a fair one. To illustrate the point we might make some thought experiments where we make a few simple assumptions. We might compare businesses in an environment where ownership of companies could be bought and sold at book value only, and there’d be no premium to pay. And to keep things simple we may assume that the stock market is closed.

I hope you will enjoy the ideas and get another perspective to use in your investing journey.