The main concern is Fonterra has effectively paid $2.9 billion in dividends on supply shares and investment units out of borrowed money since the start of Trading Among Farmers in 2011-12.
Director Leonie Guiney told two shareholder meetings in Northland there was insufficient free cashflow in some of the eight financial years to cover the dividend payments.
Those were years of large capital expenditures on new manufacturing plants, the Beingmate investment and the China Farms development.
Therefore, the co-operative had effectively paid those dividends out of debt, she said.
The previous dividend policy was that directors had discretion to pay between 65% and 75% of adjusted net profit after tax over a period of time.
“Under the new guidelines we would expect the dividend payment to be 40-60% of reported net profit after tax, excluding any abnormal gains,” chairman John Monaghan announced with the 2019 financial results.
“In addition to the new percentage of earnings two additional key principles will guide the board when considering the payment of a dividend.
“A dividend should not require our co-op to take on more debt and a dividend should not reduce our co-op’s ability to service existing debt.”
The apparently small change in policy wording has major consequences and reflects on what has been called the boosterism of the former Fonterra culture.
The phrase “over a period of time” allowed directors to make dividends if they believed the co-operative was thriving, even though net cashflow did not cover the dividend payments for that year.
Twice the directors paid an interim dividend on anticipated profit at year-end that did not eventuate, a Northland farmer who has analysed the results over the lifetime of Fonterra said.
Before TAF it was hard to get a handle on capital inflows and outflows because of industry expansion and supply share purchasing and redemptions.
Since TAF capital inflow has shrunk to almost zero because of the loss of milk market share, environmental constraints on new conversions and adverse weather, the farmer said.
That threw a clearer light on the balance sheet, including net debt, capital expenditure, depreciation, redemptions and dividends, even though it was 18 months since Fonterra paid one.
Fonterra’s capital markets director Simon Till said free cashflow is an accounting term covering the amount of cash available for interest, dividend and debt repayment.
“In a year when there was significantly higher capital expenditure, other things being equal, there would be less free cashflow available to pay dividends.
“What the company distributes in any one year is at the discretion of the directors, guided by the policy.”
The new dividend policy is more conservative and the guidelines were designed so the dividend does not result in Fonterra increasing borrowings to make a dividend distribution.
Reported NPAT will include all losses, abnormal or unrealised.
Any large gains on sales would be put to one side for the purposes of calculating the annual dividend though they could give rise to a special dividend if the board decided.
Monaghan said the new dividend policy is appropriate for the new strategy, a more conservative balance sheet and the changed circumstances Fonterra finds itself in.
“The old growth strategy dated back to 2013 and was published and fully transparent.
“We paid 72% of earnings out as dividends and at the same time increased borrowings to build plants and make investments.
“At times paying a dividend did increase our debt level but I emphasise that never did we take out a loan at the end of the year expressly to pay a dividend.”
Monaghan said people had different opinions about a policy based on adjusted NPAT or free cashflow but it was important shareholders and the market knew the policy and that it was applied carefully and consistently.
A concerned shareholders group now wants the annual meeting in Invercargill next month to approve a fully independent review of the Fonterra Shareholders’ Council.
It wants the inquiry to find a better model to ensure the council is a more effective cornerstone shareholder.
The review should include inaction by the council given the evident non-performance by Fonterra, the group said.
Council chairman Duncan Coull said the council has already announced its intention to review itself.