When we last left off (1934), the company was emerging from the depths of the Great Depression in a big way, with net profit after taxes and preferred dividends exceeding $12 million, an increase of roughly 40% year over year; when all was said and done, the company had exited from the worst economic crisis of the 20th century in a stronger position than it had been at its inception.
In 1935, when the stock was split 4:1, the company reported a double digit-increase in net profit, which reached $13.9 million; by this point in time, the dividend had grown to an annual payout of $9 million, equal to $6.75 per common share. As the company prepared to celebrate its 50th anniversary (and the one year anniversary of the innovative coin-operated vending machine), President Robert Woodruff made this comment about the brand’s equity in the annual report: “Coca-Cola enjoys the widest public acceptance in its history as it begins its second half century.”
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Earnings increased by more than one-third in 1936, to $18.6 million; over the past decade, during which the Great Depression pummeled businesses of all kinds, the Coca-Cola Company increased net income at a rate of 8.3% per annum. To meet the current demands (and to lay the seeds for continued growth), management kept their foot on the gas pedal, enlarging manufacturing facilities to meet production requirements and investing in an advertising program “at the highest level in the history of the company.”
With more than $29 million in current assets and less than $8 million in current liabilities, Coca-Cola had plenty of dry powder to continue pumping capital into the business. In addition, management continued to fuel the dividend, with the $0.50 per share rate of 1935 ($2 adjusted for 4:1 split) being supplemented by a special $2.00 year-end dividend that brought the payout for 1936 to $16 million.
The earnings power of the business continued to outpace dividend growth, with 1937 net earnings (after dividends) increasing 23% year over year (to $22.9 million) and crossing $20 million for the first time. The company disposed of a subsidiary named Crystal Carbonic Laboratory, a manufacturer of carbonic acid gas that dated back at least 15 years to the company’s early days as a public company.
Earnings sputtered a bit in 1938, increasing by less than $1 million (3.8%) to $23.8 million; the dividend was increased by 12.5%, and was equal to 76% of the net income for the year. Unfortunately, the annual reports are short and sweet, and provide little in the form of details besides saying what we’ve seen year after year – marketing is increased, capacity has been expanded, and the brand is more well known than it has ever been in the company’s history; even without specifics, that alone represents the focus towards long term company development that is embodied at Coca-Cola even to this day.
Bottom line growth reappeared in 1939, as net earnings jumped more than 14% to $27.2 million. Internationally, Coca-Cola was being selective as they expanded their footprint, as noted by Mr. Woodruff: “The Company's foreign business continues to go forward and is being expanded where conditions seem to justify.” Dividends for the year to common shareholders totaled $20 million, and had compounded at an annual rate of more than 23% over the past five years.
With World War II just beginning as Germany invaded Poland in September of 1939, the company and the world were about to be blindsided by another period of widespread pain and destruction; as we will see in the next article, Coca-Cola found a way to turn lemons into lemonade, and made a strategic decision that would forever change the perception of the brand among American citizens.
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As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, "Patience followed by pretty aggressive conduct."
I run a concentrated portfolio, with a handful of positions accounting for the majority of my equity holdings (currently two). From the perspective of a businessman, I believe this is adequate diversification.