Fonterra retains share price, promises 20c-30c dividend

Fonterra today gave its 10,500 farmers a gentle introduction to corporate life by holding their share price steady at $4.52 - despite a valuation of only $3.83 when the illiquid market for the shares is taken into account.

It also dropped the traditional "value add" label for the surplus earnings from fast-moving consumer goods and some speciality ingredients and listed them as a profit - which it anticipates will be 35c - 45c in the current season.

But the Fonterra directors also dressed up an old cooperative bogey - retentions - in new corporate attire and broke the news that it is setting a dividend policy which means that it will in future hang onto 25 per cent to 35 per cent of the distributable profit.

That means they can expect a dividend payment of 20c to 30c per share in addition to their milk payment - a total of about $6.05 per kilogram of milksolids, in the 2009-2010 season.

The 1.28 billion kg of milksolids collected in 2008-2009, produced revenue of $16 billion and a $5.20/kg payout to farmers, comprising a $4.72 milk price and a "distributable profit" of 49c/kg.

Until now Fonterra directors have decided each year how much profit will be retained by the company and how much distributed to farmers: in some years as little as a half a cent per kilogram, and in others as much as 25c/kg.

Over a total of about $40b in payouts since it was created in 2001, the cooperative retained an average of less than 1c /kg of milksolids.

One reason it has not previously had a retentions policy is that regular retentions would have lifted the value of the cooperative's shares, providing farmers with more motive to cash up their stakes - a key point of vulnerability on Fonterra's balance sheet.

Until now farmers have had to hold enough shares to cover the volume of their milkflows, and when those milkflows drop because of drought, selling up to 20 per cent of their production to another company, or quitting the cooperative, Fonterra has had to find the cash to pay out the unused shares.

This exposure to "redemption risk" has cost the cooperative $1.9 billion in the past two years.

The share re-valuation and dividends announced today are expected to lead to Fonterra quitting that liability in the next few years, leaving farmers to cash in their shared by trading amongst themselves.

This is why directors have had consultant Grant Samuels offer a revaluation of the shares which reflects the fact that they are not freely tradeable.

Grant Samuel provided two valuation ranges: a "fair value" in line with previous assumptions of "unrestricted market value" , with a midpoint of $5.10 and a "restricted market

value" range with a mid-point of $3.83 - 25 per cent below the 2009 value.

Directors keen not to frighten the horses in their gentle run-up to capital re-structuring said today they will hold the existing share value until this restricted value exceeds $4.52.

There is a tacit expectation that eventually the shareholders will work out that they could considerably boost the value of their shares by opening them up to outside investment.

But in the meantime, Fonterra will bolster the cash held back in retentions, by allowing farmers to buy up to 20 per cent more shares than allowed for by their milkflows.

Today's announcements are part of a second bite at capital restructuring after shareholders threw out a 2007 proposal for a partial listing.

The new share issue could theoretically raise up to $1.3b, but most commentators have predicted farmers will invest less than half of this.

Future dividends will take into account: any non-recurring items that affect distributable profit; average dividends paid over the previous three years; short-term earnings projections, investment priorities and gearing targets; "and any other factors the Board considers relevant including the level of milk payments to farmers".

This year's forecast distributable profit of between 35c-45c/share, includes non-recurring items such as profit from sale of Fonterra's stake in the UK joint venture with Arla.

Directors have said that its dividend target of 20c-30c/share translates to an annualised return of 7 per cent -10 per cent based on an issue price of $4.52 per share paid in February 2010 and dividends paid in April and October 2010.

But shares acquired in the transition period must be held until May 31, 2011.

Dividends in the 2010-2011 financial year, and the share price at the end of that year, "are at this point uncertain".

- NZPA