Both a dividend reinvestment plan and a distribution reinvestment plan have been announced, after being foreshadowed in the Trading Among Farmers (TAF) prospectus in 2012 and the recent Farm Source rebranding announcement.
The plunging milk price might curtail milk production expansion and therefore the need for more supply shares and dull farmers’ appetite for dividend reinvestment.
Outside investors, on the other hand, might look warily at buying more units in the Fonterra Shareholders’ Fund (FSF) given the very low return in 2013-14.
But potentially both Fonterra shareholders and investors would fare much better this financial year in terms of dividends and distributions as they await a new guidance from directors tomorrow.
Much lower milk prices result in better value-add margins and earnings for Fonterra business units like Fonterra Brands in New Zealand and Australia and in Asia and the Middle East.
That is because those units that add value have to buy their raw materials from Fonterra’s primary processing network and those internal transfer prices fell dramatically this year.
The converse, which led to such a low dividend last financial year, came when international dairy commodity prices were high and consumer resistance put a lid on price rises for further-processed goods.
Shareholders and investors would have been united in disappointment at the 10c dividend/distribution for 2013-14, being a very low rate of return on the $6-plus share or unit capital invested.
It came after a number of years during which the dividend was about 30c and in a year of record turnover and milk price.
The current guidance for 2014-15 from Fonterra was 25-35c but shareholder Greg Mills from Morrinsville made a case at the annual meeting on November 12 for considerably more based on the low milk price and the co-operative’s historic earnings.
Chief executive Theo Spierings responded with further comment about the counter-cyclical patterns of milk prices and value-add margins, plus how various consumer markets behaved.
Fonterra Brands had been instructed to keep its selling prices high as long as possible in Asia and the Middle East to hold on to healthy margins, he said.
Mills spoke for many shareholders and investors when he said this financial year was one in which Spierings and his team should achieve higher earnings and demonstrate the effectiveness of the Turning the Wheel strategy.
Another shareholder, Murray Beach from Havelock, questioned why Fonterra invested hundreds of millions of dollars in value-add products and brands and achieved only comparable returns to other dairy processors.
Spierings has always maintained that both high milk prices and high dividends were possible at the same time and his strategy was designed to achieve both.
To admit the opposite, that dividends would always be low when milk prices were high, would set up antagonism between shareholders and unit-holders that would not benefit the co-operative.
Shareholders and investors could now elect to re-invest none, all or part of their dividends/distributions in future.
They would have to do so before knowing what was called the strike price of shares and units (which are mirror images) determined as a five-day, volume-weighted average of market prices around the dividend record date.
The directors retained an option to discount the strike price or allow for any bonus issue, the announcements said.
Fonterra would always offer both the dividend and the distribution reinvestment plans together, not separately.
“The plans offer a straightforward, hands-off approach to increasing shareholding over time, free from brokerage charges,” the co-operative said.
Farmers had also been advised to consider the opportunity to cover future production growth or invest in the co-operative beyond the minimum shareholding requirement and possibly reduce the need for lump sum borrowing for buying shares in future.
Fonterra, its Shareholders’ Council and the FSF management committee would need to keep an eye on the uptake of both dividend and distribution re-investment by farmers and investors because they affected the size of the FSF.
The fund size risk management policy required the fund be maintained between 7% and 12% of the total number of shares on issue, excluding treasury stock.
That provision was included in the design of TAF to ensure the fund did not become the outside investor tail which wagged the co-operative dog.
The number of units on issue at July 31 was 109.8 million, representing 7% of the total Fonterra co-operative shares on issue, management committee chairman John Shewan said.
The FSF annual report said NZ investors owned 53% of units, Australian investors 41% and other international investors the remaining 6%.
The Accident Compensation Corporation subsequently joined the substantial security holders (SSH) at 5%.
The other two SSH investors were Australian funds.
When the reinvestment plans were announced the share and unit prices were about $6 and they had risen 18c and 15c respectively on expectations the dividend guidance would be increased when the milk price forecast was reduced.
