Coca-Cola CEO Muhtar Kent announced this morning that he is departing from his chief executive position of the world’s largest beverage producer that is in charge of producing 3.5% of all liquid consumed on planet earth each day. He has been at the helm since July 2008.
I don’t like judging executives based on the stock price changes that occurred during their stewardship because that incorporates a lot of investor sentiment. Instead, I like to weigh the question: What did you actually do to improve business performance?
In 2008, Coca-Cola was earning $1.51 per share in profits. By the end of 2016, Coca-Cola’s profits have only grown to $1.90. That’s only 3% annual earnings growth. You can make the argument that the U.S. dollar skews figures, but even if you tack on an additional dime, we are still only talking about 4% annual growth.
Compared that to the 2000-2008 period that saw earnings climb from $0.74 to the base of $1.51. That is 9.3% annual growth.
The past eight years have been the absolute worst for Coca-Cola from an earnings growth standpoint since its IPO in 1919. Perhaps this is to be expected as Coca-Cola shifted from small-cap to mid-cap to large-cap to mega-cap statu, but the dramatic underperformance compared to historical norms seems damning. From 1980 through 2008, Coca-Cola delivered almost 12% annual growth. The 3-4% growth under Kent’s eight-year leadership is unlike any other period for Coca-Cola shareholders of similar duration.
It also didn’t help that the only time Muhtar Kent engaged with the public occurred when he tried to defend the issuance of 340 million shares to Coca-Cola management as part of Coca-Cola management’s 2014-2018 equity compensation plan. The award seemed high even if Coca-Cola had exceptional management. At the time, Kent was seeking the massive stock grants while his management team only delivered earnings growth to match inflation. High pay for low performance does not sit well with anyone other than its beneficiaries.
My view is that Coca-Cola lacked a spark during his tenure. There was no muscling to deliver shareholder growth. There were no acquisitions of Dr. Pepper, Nestle’s beverage operations, or launches of Coca-Cola produced alcoholic offerings like a much-needed rum and Coke brand (my personal suggestion).
Instead, the most notable thing is that Coca-Cola is growing profits by repackaging its existing product into smaller containers and getting customers to pay more. That is a valid effort to grow profits, but it reeks of leveraging the past work of previous generations of Coca-Cola executives rather than making your own contribution.
We all understand the contributions of the Pembertons and Candlers and 1950s advertising executives to the current pricing power of the soda giant. But the question for every executive that takes over the leadership of a legendary blue-chip stock is this: What is your contribution to strengthen the fundamentals that underlie the story? Are you just riding on the coattails of the corporation’s previous glories as a freerider?
I don’t think you can point to specific actions taken by Kent that make you say “That’s worth $20 million per year. That’s where value got created in a way that a garden variety mid-career MBA executive couldn’t have accomplished.”
When Howard Schultz announced that he was stepping down as CEO of Starbucks, the stock fell 11% upon learning the news. With Kent out at Coca-Cola, the stock is up 3%. You have to be careful when you use the wisdom of crowds at a particular moment to state a case, but still, there is nothing in the immediate reaction of Coca-Cola shareholders to indicate that Kent’s leadership will be missed.
The good news for long-term shareholders is that the contributions of Coca-Cola management teams in generations past have been so exceptional that a colossal asset with 33% returns on shareholder equity remains. There are few products that have been able to maintain such profit margins–for years let alone decades–and that provides an excellent base for the new management team to harness.