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September 7, 1999

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Subject: Coke
Author: MarketWatcher1

Responding to yogi on the Yahoo board re: the impact of Coke stock on STI. (I'm still sticking to my boycott of Yahoo due to the nastiness that dominated there not so long ago. Have to say, though, it has been a bit more civil lately.)

Granted, it does seem that STI can move at times in line with KO, but I still hold strongly to the theory that over the long term, the price of KO is not so relevant, and therefore should not be viewed as having held down STI's price. (One caveat: I do accept an INDIRECT link between the two stock prices, which I will deal with below.)

Here's my argument: As long as you consider STI (with thte KO stock) on a going-concern basis (meaning that you don't think the KO stock will be sold in some fashion, a pretty fair assumption given the size of the tax bill that would become due to the US government, and who among us believes that they deserve a slice?), then the only impact KO has on STI is the value of the dividend stream paid by KO. If you accept the argument that all stock prices are equal to the present value of their future cash flows, then in this case all you are interested in is the current level of KO's dividend, adjusted by whatever dividend growth rate you want to assume for the future.

"In looking to set the fair value for KO's stock price, the market is looking at KO's total consolidated cash flow."

Here's the INDIRECT link: since KO's stock price represents the present value of its future cash flows, the fact that it DROPs is a signal that the market thinks its future cash flows may be weaker. This obviously could have an impact on KO's dividend growth rate in the future, and THAT would translate into an impact on STI's price.

But that is the big difference:

In looking to set the fair value for KO's stock price, the market is looking at KO's total consolidated cash flow. BUT: in figuring out the impact of KO on STI's price, the market is not looking at KO's total cash flow stream, but just at the DIVIDEND stream, which has always had (and WILL ALWAYS have) a more stable profile - - cash flow can bounce all over the place, but companies don't change the dividend too frequently, and when they do, it is usually up. (For a company like KO, anyway.)

So the conclusion: KO price is based on PV of total cash flows stream. STI value of KO ownership is based on the Dividend cash flow stream only. Two different cash flow streams being valued. Although they do have some linkages over the long term, they are not tightly linked in the short term. Key assumption: no sale of KO by STI, which I think is a reasonable assumption.