Saturday 19 September 2020

Fonterra's Dividend, My Five Cents -- September 2020

It has been quite the year for Fonterra, the co-operative not only won unanimous parliamentary support for the changes they sought to the Dairy Industry Restructuring Act, they also returned to profit after last year’s first ever financial loss. That profit, a stunning $1.3 billion turnaround from the previous season, saw Fonterra pay suppliers their fourth highest payout in the Co-op’s history; $7.14 per kg of milksolids and a 5c dividend on shares.

As dairy farmers we have been pretty well insulated from the worst financial effects of the pandemic, it has been business as usual thanks largely to Fonterra’s ability to navigate the strict requirements of operating under various levels of lockdown and to quickly react to changes in demand caused by Covid-19.

It struck me as curiously ungrateful, then, that the first response I saw on social media to Fonterra’s excellent result was a complaint the dividend was too low. This, it turns out, was not an isolated expression of that sentiment.

Last year every single worker at Fonterra who had earned a bonus was made to give it up, as well as forgo any pay increase, to help the Co-op achieve its self-imposed target of reducing operational expenditure by $160 million. Despite the brutal timing of the announcement, just after performance evaluations had been completed and just before the payments were due to be made, everyone from the shelf stackers at FarmSource to the people selling our products overseas worked their butts off to turn Fonterra around. They can be rightly proud of what they’ve achieved and we should never dismiss the sacrifice they were forced to make.

Complaints about dividend also reveal a fundamental yet common misunderstanding about the relationship between payout and earnings; the more Fonterra pays suppliers for milk the lower their margin on value added product, so the less money there is available for dividend. In the most basic of terms a high payout generally means a low dividend and vice versa, which is the underlying reason independent processor are always accusing Fonterra of paying farmers too much.

This year was also the first time dividend has been paid under Fonterra’s new policy; the Co-op will no longer borrow in order to pay one and any payment will only represent forty to sixty percent of their net earnings instead of the previous sixty five to seventy five percent. Such is the cost of having a financially prudent Board who value the long term health of the Co-op.

While there is provision in the new policy for proceeds of asset sales to be disbursed as dividend, it was well signalled that the earnings from the sale of Tip Top and DFE Pharma were earmarked for debt reduction. And reduced it was, by a significant $1.1 billion.

I’ve been proud of Fonterra this year; they have continued their strategy of showing leadership on issues of national importance, think freshwater reform and climate change, they not only ditched the horrific 90-day payment terms but introduced faster payments for small suppliers, and the management team continue to connect with farmers in a way Fonterra has never previously managed.

I for one am happy with the 5 cent dividend, especially if it means there’s enough left over to pay bonuses to those who so richly deserve them.


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