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No. of Recommendations: 28
Possible counterpoints---


“Mr Market offering 33.2 of trailing earnings.”
...
I think this is too simplistic of a valuation model to apply to KO;


Sure, there are other things to consider when valuing a firm.
But none of those look very good to me either.
Secular headwinds for their core business.
Brutal competition in the secondary businesses.
Bloated, overpaid and tin-eared management.
Debt is three times what it was a decade ago. Presumably a lot related to the CCE bottler purchase, but it's still debt, and didn't help earnings.
Big tax fight that might leave them weakened in a lasting way.
Fabulous firm in the past, but the emphasis might perhaps be more "in the past" than "fabulous".
Shrinking top and bottom line year after year is only one thing to look at, but it's a big thing.
For a firm whose main claim to fame is steady and rising earnings year after year, problems with net income and EPS figures are not small problems.
And now they will have to face up to problems with dividend coverage.


* KO is currently contributing just over 3% of their price as dividends - and because of its
stability in earnings can *almost* be viewed as a bond alternative. 3% looks a lot better than 1.5% (10 year bond yield).


Yes, it's a nice stable cash cow and Berkshire doesn't need the cash.
That's presumably why it's in the portfolio despite being ex-growth.
It beats cash, which Omaha already has lots of, but that's pretty faint praise.

But one might reasonably question the sustainability of that dividend.
It's a 3% dividend yield but also a 3% earnings yield.
The dividend has been rising but the earnings falling for quite a while now. That's not usually a good trend.
The current forward dividend is now more than the trailing EPS figure at Yahoo, which is too close for comfort.
I expect the dividend will probably hold in nominal terms, but I would not forecast it holding its own in real terms in the next decade.
That would require a meaningful upswing in the results.
(absent a big fall in the US dollar, meaning it would hold its own only with a shrinking yardstick)

KO does have some pricing power and thus could mitigate any inflation impact.

It's possible to view this as unlikely based on business results.
If they had such good pricing power, earnings wouldn't have been falling for so long, right?

They definitely have some products with extraordinary longevity and resilience: Coke. No question.
But that's a shrinking piece of the pie, seemingly no longer able to carry the whole dessert trolley.
If earnings didn't hold their own without inflation, I can't think of any reason they'd hold their own better with inflation.

I think of it this way:
(1) There is absolutely no reason to think it's going to be a great performer in the next 5,10,15,20,25 years.
Growth is low (negative for many years) and starting valuation is very very high.
(2) There must be a price at which it makes sense for Berkshire to sell, take the tax hit, and buy something else. Immediately, or after waiting for a good opportunity.
OK, maybe today's price isn't it. 5% higher? 10? 15? 20?

The S&P 500 equal weight index has an earnings yield that is both higher and rising faster.
Almost a quarter of the components have both higher growth rates AND higher starting earnings yields.
How hard can it be to do better?

Frankly, Mr Market is currently offering us way more than what the firm is worth.
I think we should think carefully before turning him down : )

Jim
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