<THE RULE MAKER PORTFOLIO>
Open the Calls, Coke
By Matt Richey (TMF Verve)
ALEXANDRIA, VA (July 26, 1999) -- I'll admit it -- I'm a big fan of Coca-Cola (NYSE: KO). On average, I chug three or four Diet Cokes per day. In fact, it's probably safe to say I'm a bit fanatical in my brand loyalty. When it comes to soda, my relationship with Coke is strictly monogamous. (I tried Pepsi One, but only once, and that was only for the purpose of a taste-testing analysis.) When dining out, if my request for a Coca-Cola is greeted with the question "Is Pepsi alright?," I roll my eyes in exaggerated fashion, and politely order an iced water.
As much as I love the product, I love Coke's business just as much. As mentioned in my bull argument in the Cola Wars Dueling Fools, Coca-Cola's business model has a winning combination of a powerful brand name (the world's strongest, according to Interbrand), a low-price repeat-purchase product, and a pervasive global distribution system. Also working in Coke's favor is that according to our crack team of Foolish scientists, human beings are expected to exhibit thirst on a daily basis for the foreseeable future.
I could heap more praise on Coke's business, its extraordinary cash flow dynamics and such, but that's not what today's column is about -- not at all. As favorably biased as I am about the company -- and I am long the company's stock -- I have a bit of a beef with Big Red.
The problem is selective disclosure of material information. In the past two years, Coca-Cola has developed the nasty habit of holding closed-door meetings and by-invitation-only conference calls for Wall Street analysts, many of whom are not shareowners and may even be short the stock!
There are no press releases that announce these events, much less a detailed transcript after the fact. Kind of like its secret formula, the company does a pretty good job of hiding its sins. Coke held two meetings last week -- Thursday morning's earnings conference call and Friday's analyst meeting. Both of these events were news to me when I saw interviews with Coke analysts on CNBC after the meetings.
Even though you might not hear about these clubby get-togethers, you can definitely see the after-effects: the stock moves. Coca-Cola releases material information to the "elites" of the investing world, and leaves us plebeians to make do with trickle-down information from second- or third-hand sources.
Earlier this year, one Coca-Cola shareholder stood up against this kind of corporate double standard with the following statement:
"Today, many companies matter-of-factly favor Wall Street analysts and institutional investors in a variety of ways that often skirt or cross the line of unfairness. These practices leave the great bulk of shareholders at a distinct disadvantage to a favored class."
That quotation is taken from Berkshire Hathaway's 1998 Shareholders' Letter, written by Warren Buffett, owner of an 8% interest in Coca-Cola (via Berkshire) and also a member of Coca-Cola's board of directors. Hmmm, maybe -- just maybe -- this was Buffett's indirect but not-so-subtle way of suggesting that Coke management might reform its shareowner communications.
In essence, Buffett's argument is of an ethical nature -- that it is ethically wrong for a public company to show favoritism to a particular class of investors. Interestingly enough, Coke's website includes an FAQ, with the following question and answer:
Q: "What is your policy on ethics?"
A: "Honesty and integrity have always been cornerstone values of The Coca-Cola Company. As Company representatives, we all have the responsibility to act in every situation according to the highest standards of ethical conduct."
Based on this statement, it seems that Coke's management should be willing to make every reasonable effort to disseminate information equally to all investors.
Well, it just so happens that opening up conference calls and analyst meetings to the public has never been easier thanks to the capabilities of the Internet. In fact, right now broadcast.com is running a special, offering four consecutive conference calls for free! Even little Jimmy next door could afford to webcast his lemonade stand's summer earnings to the public.
The price is right; equal disclosure is ethically right and in line with Coke's stated policy on ethics; and from a financial perspective, it's the right choice, too. As Louis Corrigan so aptly explained in our special on Investors' Rights, "The payoff from a more knowledgeable and loyal shareowner base comes, in part, from a lower cost of equity capital. Since businesses are ultimately valued on the difference between their cost of capital and return on capital, lowering the cost of capital is just as important to a company's long-term prospects -- and to shareowners' profits -- as increasing the return on capital." In other words, informed investors are less likely to churn a stock, and less churning means lower stock volatility. According to textbook financial theory, a less volatile stock has a lower cost of capital. Therefore, disclosure reform would be a smart business decision
And if those reasons aren't compelling enough, just look at the success of Corporate America's disclosure role models: Microsoft, Intel, and Cisco Systems. These three companies ranked tops in the Fool's evaluation of ten well-known companies' investor relations websites. In particular, Microsoft has done a marvelous job of going above and beyond the call of duty to level the playing ground between individual investors and the Wall Street crowd. This past Thursday, the software giant held an all-day financial analyst meeting, in which all of the top-brass gave presentations. As you can see on this page, not only did Microsoft webcast the event live, but it also made available video and audio archives, transcripts, and Powerpoint slides. To put it mildly, Microsoft's example proves that an egalitarian disclosure policy doesn't exactly hurt shareholder returns.
For even more good reasons for Coca-Cola to open its conference calls and meetings, take a look at Dale Wettlaufer's well-thought-out e-mail that he sent to a Coke employee back in December. I'm posting Dale's response with his permission, but I'm deleting the Coke employee's original message to protect the guilty:
Fools, if you're of the opinion that Coca-Cola should reform its disclosure policy, I strongly encourage you to make your voice heard. I've been in contact with the company, and I'm hopeful that they are considering our concerns. If you'd like to contact Coke, feel free to make use of this letter (in part or total) in explaining why you as an individual investor deserve the same access as the Wise to a thorough explanation of the company's business operations. Send your letters to the following address:
The Coca-Cola Company
Attn: Investor Relations
P.O. Drawer 1734
Atlanta, GA 30301
Alternatively, you can phone the company at (404) 676-2121, and ask for Investor Relations. Whether you contact the company by mail or by phone, be sure to make your request politely. It's not an "us versus them" situation; what we're asking for is a "win-win" deal. Take the high road, Fools.
Beginning tomorrow and for the rest of the week, your Rule Maker managers will discuss their opinions for the August $500 investment.
Good night, and Fool On!
[And by the way -- if you know of some friends who might like to learn about Coke's current practices, scroll up and click on the "E-mail this to a friend" link in the upper-right-hand corner.]
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Day Month Year History R-MAKER -1.48% -2.69% 10.44% 39.08% S&P: -0.68% -1.82% 10.22% 36.34% NASDAQ: -2.72% -2.47% 19.45% 58.46% Rule Maker Stocks Rec'd # Security In At Now Change 6/23/98 68 Cisco Syst 29.21 61.06 109.08% 5/1/98 82 Gap Inc. 23.05 47.25 104.96% 2/3/98 54 Microsoft 45.13 87.63 94.14% 2/13/98 44 Intel 42.34 62.88 48.51% 5/26/98 18 AmExpress 104.07 136.50 31.17% 2/3/98 66 Pfizer 27.43 35.31 28.72% 6/3/99 11 *Delphi Au 17.19 19.19 11.62% 2/6/98 56 T. Rowe Pr 33.67 35.25 4.68% 8/21/98 44 Schering-P 47.99 49.63 3.40% 2/27/98 27 Coca-Cola 69.11 63.06 -8.75% 2/17/99 16 Yahoo Inc. 126.31 134.31 6.34% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Exxon 64.34 78.00 21.24% 3/12/98 15 Chevron 83.34 92.38 10.84% 3/12/98 20 Eastman Ko 63.15 69.19 9.56% 3/12/98 17 *General M 61.28 65.94 7.60% Rule Maker Stocks Rec'd # Security In At Value Change 2/3/98 54 Microsoft 2437.28 4731.75 $2294.47 6/23/98 68 Cisco Syst 1985.95 4152.25 $2166.30 5/1/98 82 Gap Inc. 1890.33 3874.50 $1984.17 2/13/98 44 Intel 1862.83 2766.50 $903.67 5/26/98 18 AmExpress 1873.20 2457.00 $583.80 2/3/98 66 Pfizer 1810.58 2330.63 $520.05 8/21/98 44 Schering-P 2111.7 2183.50 $71.80 6/3/99 11 *Delphi Au 189.09 211.06 $21.97 2/27/98 27 Coca-Cola 1865.89 1702.69 -$163.20 2/6/98 56 T. Rowe Pr 1885.70 1974.00 $88.30 2/17/99 16 Yahoo Inc. 2020.95 2149.00 $128.05 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 15 Chevron 1250.14 1385.63 $135.49 3/12/98 20 Eastman Ko 1262.95 1383.75 $120.80 3/12/98 20 Exxon 1286.70 1560.00 $273.30 3/12/98 17 *General M 1041.80 1120.94 $79.14 CASH $255.59 TOTAL $34238.78
Notes: The Rule Maker Portfolio began with $20,000 on February 2, 1998, and it added $2,000 in August 1998 and February 1999. Beginning in July 1999, $500 in cash (which is soon invested in stocks) is added every month.
*Although DPH is not a Foolish Four stock, it was spun-off from GM on June 3, 1999