Friday, March 29, 2024

Dividend support an option

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Fonterra chairman John Wilson has explained the board’s decision to bring in the option of drawing on its balance sheet and cashflow performance to support dividends less than a year into trading among farmers (TAF).
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Wilson said three to four months ago the board updated its dividend policy which is to pay 65-75% of operating earnings.

It will look through financial years so it could be based more on a rolling average.

Volatility impacts on the business from global dairy commodity price swings, fluctuations in exchange rate and product stream returns meant the co-op’s earnings were subject to significant volatility year on year and even within years.

“The board will always make the final decision on dividend but what we’re saying is supporting a dividend from the balance sheet is an option we could consider.”

In the current financial year the “fantastic milk price” going to farmers would put pressure on profit in Fonterra’s businesses and the dividend forecast, still at 32c/share or unit, would also be under pressure.

“What we want to create here is a sense of stability and confidence for the market,” he said.

“If there’s confidence in the market we have liquidity.”

A liquid market is fundamental to the success of TAF as it allows farmers to freely and confidently trade shares with each other. Wilson said over the past four years Fonterra’s balance sheet had benefited from 70c/share in retentions from operating profit.

Moving some of that through years was acceptable business practice, particularly in light of what it aimed to achieve.

“It’s not about taking money out of the balance sheet and giving it to unit holders,” he said.

“It’s not about that at all. This is about giving us an option to support the dividend so the market and farmers as the ones who predominately own shares have confidence in investing in Fonterra shares and so they can have confidence in the market.

“We have very volatile earnings and we want to be able to give as much clarity as we can as to what the final dividend is we’ll pay. The target is to pay around the current levels.”

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