In the podcast, Motley Fool senior analyst Jason Moser discusses:
- Coca-Cola's (KO 0.30%) strong first-quarter organic revenue growth.
- CEO James Quincey's warning of "storm clouds" on the horizon.
- The success of Coke's 2018 acquisition of Costa Coffee.
- Why companies like Coke and Pepsi (PEP -0.04%) are outperforming major beer companies.
Motley Fool senior analysts Maria Gallagher and Alyce Lomax break down what investors need to know about reviewing board members, CEO Pay, and the other big issues surrounding proxy voting.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
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This video was recorded on April 25, 2022.
Chris Hill: It's a thirsty start to the week and we've got just the topic to quench it. Motley Fool Money starts now. [MUSIC] I'm Chris Hill, and I am joined by Motley Fool Senior Analyst, Jason Moser. Thanks for being here.
Jason Moser: Hey, thanks for having me.
Chris Hill: Let's start beverages. Shall we?
Jason Moser: Okay. [laughs] Something I know little bit about.
Chris Hill: As do I, but I'm looking to learn more because Coca-Cola put up a first-quarter report with numbers that we don't normally see from a beverage company of this size. You and I were chatting before we started recording here. There are a few numbers where you can get to. The one that stood out to me was organic growth of 18 percent.
Jason Moser: Yeah.
Chris Hill: What else stood out to you? Before we get to where this business is going over the next year, because I think that's pretty interesting when you think about some of the comments from the CEO. But just in terms of the quarter we just went through, what stood out to you?
Jason Moser: I would say probably that number really is what stood out first and foremost, just organic revenue up 18 percent for a business like this is not something you see all that often. It is worth noting. They did see a benefit right to folks getting back out in the restaurants and whatnot. They did note the on-premise sales performed well. But all things considered, this is in a world of 52-week lows. These shares are as refreshing as a Cherry Coke. You look at how the stock is performing so far this year, it's been tremendous. Now, you stretch that timeline out a little further and it's not as impressive. But that's not really why you own a stock like this. I don't think in the first place. This is a good dividend payer, it's a stable business, and it's becoming very well diversified. That's really another thing that stood out to me. This is just a really well-diversified business.
Chris Hill: James Quincey, the CEO, said that there were storm clouds on the horizon for the business. I take him at his word, but I will also note that they didn't change their guidance for the rest of the fiscal year. [laughs] Which makes me wonder, where are the pitfalls for this business outside of inflation, which we can just safely assume is affecting every business?
Jason Moser: Well, to your point, they did reiterate guidance for 2022 and that's comparing that to the 18 percent organic growth they witness to me, the guidance for the four years organic revenue growth of 7-8 percent. That's a bit more of the norm. But to your point there on the pitfalls, the headwinds, you are looking right now at a world full of uncertainty. Well beyond just the interest rate conversations that we have here. You're looking at geopolitical conflict obviously with what's going on in Ukraine. Clearly, there are the headwinds in the China market for them as COVID continues to do its thing there, and they continue to lock down. I think that between that and what is clearly a very inflationary environment, you put all that together, it's understandable that they set some relatively conservative expectations. But this is a business because it's so well-diversified, they have areas of the business that can perform better than others in certain times. They are able to deal with inflation through pricing. They do seem to possess that pricing power at least today. Now, the question really remains, will that be the case a year from now? But they do seem to be very thoughtful about it. One of the ways to go about it is in the way that they package things. It's no longer just like the 12-ounce can of coke. They've got all sorts of different sizes and offerings to meet consumers wherever they really are. I think that's another way that they are able to deal with this inflationary environment, is just through ramping up the number of offerings with any given product line.
Chris Hill: We are nearly four years away from the time in 2018 when Coca-Cola announced it was buying Costa Coffee. I believe the price tag was just over five billion dollars.
Jason Moser: Yeah.
Chris Hill: I think we said at the time we're fans of coffee. Historically you look at how Coca-Cola has grown its business. It is built out a portfolio of beverage offerings outside of the namesake brands, but this was not going to be the typical acquisition. This is not, we're just going to put you right into our distribution network. This one seemed a little bit more complicated. It seems like, based on what we saw in this most recent quarter, it's starting to pay some dividends.
Jason Moser: Oh man, is it ever. I bet you most people probably either, A, didn't know that Coca-Cola had their foot in the coffee space, or, B, just forgot about it because it was an acquisition. They just rolled into the family and just kept things going. But they saw growth in the coffee vision of 27 percent. That's almost all really, Costa Coffee. We talk a lot about Starbucks here, but Costa globally, it's a very large player in the coffee space. Seeing that paying off, I think we've pretty much made the case for coffee is an investment. You had been at legally addictive. [laughs] I think probably going to be very difficult market to disrupt just coffee in general. Knowing that they have that in their portfolio as well, I think is very encouraging.
Chris Hill: Let's zoom out from big soda. Because you're right, you look at Coca-Cola and Pepsi, these are stocks that are not really lighting the world on fire over the past five-years. But as you said, that's not why you own stocks like this. They're really more for the ballast part of one's portfolio. But when I look at another big beverage segment, beer, it seems like the soda companies are just, or I guess I should say the soft drink companies because they're more than just soda. The soft drink companies really seem like they are, I don't know if they're better run or if their economics are better, I just know that when I look at big beer stocks, they're not nearly as attractive as big soda.
Jason Moser: Yeah, I tend to agree. I think a lot of that boils down to beer is beer. It's that one thing and it's always competing with other offerings like wine and spirits. The demand ebbs and flows, but with the soft drink companies like Coca-Cola, what we're seeing is that they ultimately are able to be more things for more consumers. It's not just Coca-Cola. It's Coca-Cola, it's sodas, it's water, it's tea, it's coffee. They are now doubling in things like hard seltzer. Topo Chico I think is their latest offering there. They're seeing some success in the hard seltzer space as well. Where you look at something like a company we talked about last week, Boston Beer, which perfectly good business, but they have witnessed over the last several years a lot of challenges in beer. For a company that is called Boston Beer, they are focused on what now? They are moving and they refer to it this way, they call it beyond beer. They're moving beyond beer. You see more investments in things like cider and hard seltzer. But still, they're stuck to that one demographic. When you see the competitive jockeying with things like spirits and wine and then you look over on the other side you see the beverage companies like Coca-Cola and their ability to really fulfill demand in all corners of the globe, it's not hard to understand why those businesses seem to be performing better because it just seems like they are catering to a far larger market opportunity.
Chris Hill: Is a positive catalyst for Budweiser, Molson Coors, and even to some extent Pepsi and Coke as well. More venues opening up, more live events, because certainly, you go back in time two years it was the exact opposite. We saw Coca-Cola and Pepsi slashing guidance because it is more profitable for them to sell their product in stadiums and concert venues than it is to sell cases.
Jason Moser: It definitely feels like these are tailwinds that are going to help for sure. We'll get some more ideas as to actually how they quantify that with the coming quarters. But, yeah, I think your point is well taken there. All of these beverage companies, they cater to the consumer in the home, but also the on-premise. That on-premise can be quite lucrative in a lot of cases. I suspect those would be some tailwinds that we'll learn more about here in the next couple of quarters.
Chris Hill: Lastly and then I'll let you go, Pepsi reports tomorrow, I believe. Safe to assume that we're going to see, if not similar results out of Pepsi, perhaps similar comments regarding the potential strong clouds on the horizon?
Jason Moser: I would imagine so. I think these are two businesses. They remind me a lot of Lowe's and Home Depot. They are very similar in what they do. The neat thing about Pepsi is the salty snacks division. There is a little bit more of an overall food company there in Pepsi with things like Quaker and Frito-Lay and all that. [MUSIC] It's a little bit more difficult to manage. They are going to be subject to some different cost pressures when it comes to inflation. But, yes, I imagine we'll hear more or less similar comments.
Chris Hill: Jason Moser, thanks for being here.
Jason Moser: Thank you.
Chris Hill: If you're like me, you've been getting more mail lately from the companies in your portfolio. Proxy voting season is here, which means it's time to make your voice heard on the boards of directors overseeing your companies. Breakdown how to review board members as well as some of the other big issues around proxy voting. Here's Motley Fool Senior Analyst Maria Gallagher and Alyce Lomax.
Maria Gallagher: Hi, everyone. Maria Gallagher here, and I'm thrilled to be talking with Alyce Lomax together we are part of the corporate governance initiatives here at The Motley Fool. We're going to be taking some time to talk through different elements of proxy season, which is about to start. Hi Alyce, it's so good to see you.
Alyce Lomax: It's so good to see you too. Thanks Maria.
Maria Gallagher: First off, can you explain a little bit about what the two of us are doing during this proxy season.
Alyce Lomax: While we are looking through the proxy statements of a lot of Motley Fool companies. For people who don't know proxy statements are associated with company's annual meetings. That is where shareholders can get information on CEO compensation, executive compensation, the board of directors, auditors and shareholder proposals. We're looking through a lot of those proxy statements and getting ready to do our votes.
Maria Gallagher: Perfect. We're going to actually talk through this really great email question we got from Liz. She starts with some common questions that we've both been getting a lot of. "Every year I struggle with the conviction that my voice should be heard, but also with the questions about how to adequately understand the issues. Do we think it's important for small shareholders to participate in the votes? How should we evaluate board members, executive pay deals, accounting firms? The easiest votes are generally the shareholder proposed ones, but how can I best inform myself about people and the issues? The company's statements don't seem to be the most objective and the default there's always to vote with management." There are a lot of great questions, lots of great elements within that. To start, Alyce, do you think it's important for small shareholders to participate in these votes, or do you think proxy voting is worth your time?
Alyce Lomax: I absolutely do. I think it is something that actually here at the Fool, we're big believers in being part owners of our company, holding for the long term. Making our voices heard through that voting process is super, super important. Having been here for 18 years and following corporate governance over the years, I can say that 18 years ago, shareholder votes generally did not go against management. But in recent years we're seeing a lot more shareholder voice in terms of double-digit percentage votes on certain proposals. Where last year with ExxonMobil, we saw a really interesting shareholder vote against management in that case for engine number 1. We've seen CEO pay packages getting voted down. That just goes to show that it is part of the democratic process of being part owner of a public company. It just is a very important thing to do to make your voice heard on some of the most important issues over time.
Maria Gallagher: Exactly. I'll just add to that fact, it feels overwhelming to think, well, my vote's so small, it's never going to become a majority. But I think it's important to note that with these types of votes, it doesn't have to be a majority. If maybe they get 10-15 percent of votes that's enough for management to really take stock and really revamp what they're talking about and come up with different proposals for the next year. Because they don't want to get to a point where there is a majority. They will try and combat that if they see a good amount of people voting that way. It does really matter I think. The second part of this question talks about how to evaluate board members and management as well. For board I'll look at their experience. Does it all seem very similar? It's common to really see the Board members who have experienced working in private equity venture capital. But is that the whole board? I think that's good and interesting experience. But if it's a background of everyone it doesn't imply that there are those differences of experience and opinions we want in a boardroom.
If they work at a different company, how related as their company to the overall mission and growth of the company that you are studying? Will they bring in opinions that will help push management, lend expertise? Or does it feel like a random company that doesn't really have very much to do with the company that you're studying? I also look at the gender and ethnic breakdowns of the boards and the diversity reflected in the overall makeup of the board and other boards that these people are sitting on. If that conflicts or it seems like they're overboarded. For management I spent a lot of time looking at incentives and compensation. If you look at the median to CEO worker pay ratio, which is if you do command F in most proxies and type in median and you can actually really easily find it. It shows not only how well the CEO is compensated, but how they treat their general employees. Which I think really speaks volumes. You can look at Glassdoor reviews, you can look at ratings, but money really talks. The average CEO to work here pay compensation ratio in 2020 was 351 to one according to the economic policy institute. Understanding the compensation structure for the people who are the biggest decision-makers of accompany really helps me determine how I feel about the future growth of this company and how I feel those conversations are happening at the highest level. Is there anything that I missed Alyce that you would like to add?
Alyce Lomax: I don't think so, I strongly agree with everything that you said. How important it is to look at the board and make sure that there are, like you said, different types of experience, different tenures. If you see a board where there are too many people who have been there for a very long time, that's not great. You want a good mix of trying to avoid things getting to chummy over too many years. Absolutely, agree that how the CEO and executives are compensated and whether the board is keeping the right checks and balances. All of that is super crucial so totally agree.
Maria Gallagher: Then she asked a little bit about how to get the best unbiased information. I think that's a really important element of thinking about proxy voting. Because you want to understand both what management's saying and what they're not saying, being able to read in between the lines. What are some of the places you look for that information, Alyce?
Alyce Lomax: I got to say the news media, they will cover some of the highest profile types of cases of things that are going on with companies. Proxy preview and as you saw, that proxy preview is actually an [inaudible] project. Where they go through what issues are being posed to companies during the year. There are proxy advisors out there like ISS and Glass Lewis and investors can actually get rough corporate governance scores from ISS if they go to Yahoo! Finance, put the ticker symbol in, and you can get some scores on risks of the Board, CEO compensation and that thing. Harvard Law School on corporate governance is a good place to get an idea of what's going on. Generally in the corporate governance arena, that's always a good source. That totally agree that there's definitely their side of things in the proxy statement. When it comes to shareholder proposals, I always think it's so important to read the proposal and management's response and really put a critical eye on what's going on there and make that decision accordingly.
Maria Gallagher: Yeah, I also would say I think when you're reading through those proxies, looking at companies within a similar sector to have compare and contrast of what are some sustainability reports? What are some companies showing? What are some companies not showing? Comparing and contrasting and creating a benchmark in your mind for a sector is really helpful. As well as all of those great sources that Alyce I look at AFL-CIO, which stands for the American Federation of Labor and Congress of Industrial Organizations. You can type in tickers and see Management and Compensation breakdowns. Again, that median to CEO worker pay ratio, I think, is one of the most important metrics you can look at. That is really easily accessed there as well. Finally, this is something that, like I said, Alyce, and I will be spending a lot of time in the next couple of months. Proxy season is usually May to July. We'll be spending a lot of the next couple of months thinking about this. Alyce what are you interested in watching? What are you excited for this proxy season?
Alyce Lomax: Well, personally, I think that some of the biggest issues that we're going to be seeing brought up in proxy season this year are climate risk and how companies are disclosing climate change information, sustainability information, and also diversity type of things. How are companies? Are they disclosing their workplace breakdowns and goals and metrics around diversity and inclusion? I think those are going to be two areas to watch for. As always, CEO pay, which we talk about inflation a lot these days, but there's been inflation and CEO pay for many decades. The CEO compensation is always a big thing to watch. Yes.
Maria Gallagher: Yeah. Absolutely and I think that when we're seeing this rise and you've seen the past probably five, 10 years, this rise of people's interest in ESG style of investing. We're really seeing shareholders are interested more in transparency from these bigger corporations. I think that's the thing, is looking through sustainability reports. Even if a company isn't perfect, if they're honest and if they're not trying to shy away from being transparent about their numbers and their metrics. I always really think that speaks volumes about the company culture, the way the company is run and management taking accountability as opposed to just saying we're perfect, just trust us. Saying we're not great at these four things and here's why and here's how we're trying to get better. I always really respect when management does that. I really enjoy looking through all of the sustainability reports and those proxy reports. [MUSIC] Thank you so much for coming and speaking with me today, Alyce and Liz, thank you so much for your email. I really appreciate that.
Alyce Lomax: Thank you, this is great. [MUSIC].
Chris Hill: If you want to email the show drop a note to [email protected]. As always, people on the program may have interest in the stocks they talk about, The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening. We'll see you tomorrow. [MUSIC]