Capital Allocation Snapshot: Coca-Cola

This is the first Capital Allocation Snapshot being posted on my Substack, and the first Berkshire themed post that I am doing this month leading up to the annual shareholders meeting. Coca-Cola (KO) is probably Warren Buffett’s most famous investment, making the initial purchase in 1988. Since then Buffett’s $1.3B investment is now worth $25.4B and provides a 50% dividend yield on the original cost basis. In this post I will summarize Coke’s capital allocation by looking at their recent cash flow data.

Cash Flow Summary

The first thing I want to do is look at the main categories on Coca-Cola’s cash flow statement. Cash from operations have fluctuated around $10B. KO produced its lowest cash from operations over the past five years in 2018, at $7.6B, peaked at $12.6B in 2021, then fell a tad in 2022.

Four of the last five years Coke spent cash on investing items, the exception being 2018 with proceeds of almost $6B. There doesn’t seem to be much of a trend with the spend on cash for investing. In a minute we will see how Coke invests their cash in more detail.

Coke’s cash from financing has hovered around $9B, dipping down to $6.8B in 2021. In most years, KOs cash from financing amounts to over 80% of cash from operations. The figure in 2018 even surpassed cash from operations by $2.7B.

The net change in cash has generally increased over the last five years, mainly coming from the the elevated cash from operations and diminished financing in 2021.

Cash for Investing

Going deeper, we will next look at Coke’s main investment line items. Over the past five years, capex has been around $1.5B. This capex figure is about 10-15% operating cash flow, which isn’t particularly high but I am a little surprised KO spends that much on capital expenditures.

Next is Coke’s net change in investments. The company constantly buys and sells investments, my guess being they are fixed income investments but I would have to look into the details. It is interesting that KO has received quite a bit of proceeds from selling these investments. The $7B gain in 2018 especially stands out. Looking back at 2017 shows that they invested $17B in investments, then sold $14B worth in 2018 and only re-invested half leading to our net gain figure.

The acquisition and sale of business varies quite bit year over year. A large acquisition was made in 2019 at $5B, the next largest being $2.6B in 2021. Sales of business provided some cash in 2022 and 2018. It appears that most of Coke’s acquisitions involve acquiring stakes in global bottling companies and other soft-drink/energy drink companies.

I find it interesting that Coke has been selling a couple hundred million property each year, with 2019 being an outlier year of nearly a billion in cash received. The “other” category contributes minimally except for 2022 with a $760M expense. Apparently the large 2022 expense was primarily due to hedging activities.

Cash from Financing

Getting into the home stretch here, we see Coke’s cash from financing. The net change in debt has shown that the company has been primarily deleveraging over the past few years. The reduction in debt has amounted to nearly $8B over the last five years, with 2021 showing a slight bump in debt issuance.

The equity lines in Coke’s cash flow statement are not exactly what you want to see as far as capital allocation goes. In each of the last five years Coke has issued stock, and not just a little stock, but $4.6B worth. My guess is that the issuance of equity of for stock based compensation.

Coke has been repurchasing a good amount of stock, about $4.5B worth since 2018. Stock repurchases are a key part of capital allocation. However, since KO has offset these purchases with stock issuance, the shareholders are not receiving any benefit.

One way where Coke makes it up to shareholders is their hefty dividend. Each year Coke pays out about $7B. Comparing the dividend to their cash from operations, typically 60-70% of the cash generated by the business is returned to shareholders. This ratio is pretty typical for large, slow growth companies. Given that Coke’s dividend is the largest line item on their cash flow statement, this use of cash is their primary form of capital allocation.

Conclusion

In summary, Coca-Cola generates a consistent level of cash from its operating business, and has benefitted from its sale of investments over the years. The main use of this capital has gone towards making a few sizable acquisitions, and the large dividend payout. The large dividend seems sensible since Coke is a mature company, and more analysis would need to be performed to see if their acquisition history has benefited shareholders. The most negative aspect of KOs capital allocation is the large share issuance that is being masked by share buybacks. I believe someone interested in Coke would really need to study the managements compensation scheme to determine if it is fair or egregious.