Against a background of international dairy price volatility, it plans to give more market commentary but cease providing guidance on future earnings per share.
“This new policy will enable the business to provide a longer-term view on any potential volatility in earnings,” Wilson said.
“(It) will take into account short- and medium-term earnings to deliver a dividend per share (and unit) between 65 and 75% of adjusted net profit after tax over a period of time.”
That might have the flow-on effect of dampening investors’ expectations and moderating the unit and share prices on the NZX exchange, although Wilson said that was for the market to determine.
The board’s intention was to provide as much certainty as possible for dairy farmers and investors, which was a welcome feature of the new transparency under Trading Among Farmers.
The board would continue to have discretion over actual interim and final dividends and would always take into account market conditions and Fonterra’s financial position, he said.
Fonterra forecast its third consecutive 32c dividend, for financial year 2014 (FY14), repeating those delivered in FY12 and promised for FY13, which ended on July 31.
“This new policy will enable the business to provide a longer-term view on any potential volatility in earnings.”
At the same time it increased the forecast farmgate milk price 50c to $7.50/kg milksolids, which if it survived to be the final payout for this season would be the third-highest achieved by Fonterra in 14 years.
“But if there is anything I can predict with some certainty, it is that $7.50 won’t be where this season’s milk price ends up,” Wilson said (see graph).
Fifteen months remained before the season was finalised and world dairy prices, while high, were moving all of the time, he said.
Nevertheless, the boost by 50c/kg at the start of the season speaks volumes about the confidence of management and directors in the trading outlook while farmers are still getting the cows in.
“Supply constraints in Europe and China during the northern hemisphere spring have contributed to an increase in dairy prices of 3% over the past two months and the New Zealand dollar has weakened against the US dollar,” Wilson said.
The advance rate schedule has also been increased, starting at $5.50/kg – $1.50 higher than this time last season.
Federated Farmers dairy section chairman Willy Leferink hailed the potential of the revised forecasts to clear the overdrafts of farmers affected by drought last season.
“We believe there will be a lot of pressure on Fonterra to come up with a substantial dividend but a high milk price will put pressure on margins,” Leferink said.
“That is not necessarily a bad thing, as it will drive the company to perform.”
In the milk price and dividend announcement Fonterra chief executive Theo Spierings said international dairy trade growth was being led by strong demand for powder.
“This trend, relative to prices for cheese and casein, currently would have a short-term negative influence on product mix returns during the first half of FY14.
“As we drive for growth in our consumer businesses during the first half of FY14 we are likely to have to absorb some of the expected substantial increases in the cost of goods arising from current high commodity prices and this could have an impact on margins.
“Taking into account the headwinds we face and current market volatility, the FY14 estimated dividend of 32 cents per share may be outside the 65-75% range,” he said.
The dividends forecast for FY13 and FY14 indicate a 4.4% annual gross yield for investors and farmers on share and unit trading prices of about $7.30.
It is a 5.8% yield for investors who paid the unit issue price of $5.50.
Related story: Fonterra lifts forecast payout