Fonterra has announced a second on-market share buyback programme, to begin in late August and run for up to a year.
It will spend up to $50 million on buying up to 77 million shares – under 5% of the total 1.6 billion shareholding, in accordance with Section 65 of the Companies Act.
The first $50m buyback was implemented from June last year and another $300m is held in reserve for unspecified share market liquidity support measures.
Chief executive Miles Hurrell said the share buybacks are part of Fonterra’s capital management programme and designed to be “value accretive”.
That means Fonterra hopes its share price will rise because it is, in the opinion of the company, undervalued currently.
The supply shares are trading among farmers at around $3.20, having risen steadily from $2.60 in March, when the promise to make a capital return of 50c a share was made.
With the latest share buyback announcement, Fonterra is lining up its ducks for end-August, when the capital return will be paid, and the share price could fall sharply.
When the first buyback was announced last year, Simon Till, director of capital markets for Fonterra, said buying back shares at then-current low prices could be a good investment for the company.
It considered its shares undervalued because of its asset backing, financial results and guidance and the longer-term strategy already announced.
Under the new share standard, which has a required minimum that is one-third of the previous standard, most Fonterra shareholders have a considerable excess of “dry” shares.
Various share market analysts have warned of the risk of low market liquidity in a farmers-only stock, which would depress the price.
On the other hand, Fonterra has a strategy it believes will generate healthy profits and therefore share dividends to encourage farmers to hold, and trade readily among themselves, all the technically excess shares.
To date Fonterra has bought back a little over 4 million shares at an average price of $2.61 and therefore spent only $10m of the first $50m allocation.
It has expressed satisfaction with the market function and the very little financial support Fonterra has needed to provide.