The likely dividend for the 2017-18 financial year will be 10c a share and FSF unit, already paid out as an interim dividend earlier this year.
The final numbers will be announced on September 13.
The 2013-14 dividend was also 10c when the milk price soared over $8/kg and the input costs for added-value products were so high profit plummeted.
This time the directors have trimmed 5c/kg from the milk price, now forecast to be $6.70, but left their earnings guidance unchanged at 25-30c/share.
New chairman John Monaghan said the co-operative’s balance sheet needed strengthening in an already challenging year because of the damages payment to Danone and the impairment of the Beingmate investment.
“As we said in May the higher milk price, which is good for our farmers, has put pressure on Fonterra’s earnings.
“You never want to have to reduce the milk price at the season’s end but it is the right thing to do and $6.70 remains a strong milk price.”
The directors chose to depart from the amount calculated by the farmgate milk price manual, an action permitted in the constitution and also taken in 2013-14.
The manual price would have been $6.75, Fonterra confirmed.
“During the process of closing our books for the financial year-end the need for these actions has become clear,” Monaghan said.
“Our forecast performance is not where we expected it would be.
“While the numbers are not finalised our margins were less than we forecasted right across our global ingredients and consumer and food service businesses.”
Market analysts said the unitholders are again being treated like second-class stakeholders when compared with farmer-shareholders.
“Fonterra borrowed a huge amount of money to build processing plants but that has not translated into more income, earnings and dividends,” Craigs Investment Partners senior researcher Mohandeep Singh said.
“That has come at a major cost to investors and a minor cost to farmers.
“The balance sheet is still poor and 50% gearing is high for a commodities company.
“Because milk production is not growing and farmers don’t have to buy shares, the only way to reduce debt is to retain more earnings by cutting dividends.
“Investors also face the uncertainty of the new chief executive taking the company in a new strategic direction.”
Acting on the advice of Singh and colleague Roy Davidson, Craigs recently removed FSF from its NZ equities portfolio because of prolonged under-performance.
The confirmed $6.70 payout will be welcomed by farmers but they have lost between $16,000 and $24,000 per average-sized farm in monthly wash-up payments – $8000 from the 5c payout reduction and $8000-$16,000 from the dividend cancellation.
FSF units and Fonterra supply shares dropped 3% in value after the announcement, to below $5.
Chief financial officer Marc Rivers said the moves taken were to maintain a strong balance sheet and a good credit rating, both very important objectives.
“That gives us leverage to be able to make the investments to continue to grow the business.”
The combination of milk price reduction and dividend cancellation would enable Fonterra to retain $200 million-plus.
“Let me make it clear this is not a satisfactory performance and we have to do everything we can to turn that around.
“We need to be able to generate strong returns even in an environment of high milk prices.”
Rivers agreed unitholders also need to receive a good return to have an effective FSF structure and liquidity for supply shares.
Federated Farmers vice-president Andrew Hoggard said farmers’ energy and thoughts will be distracted by calving and the start of the new milk season.
But the cancellation of the final dividend raises a whole lot of questions for him.
“There may be sound reasons, but why now?
“Why not signal this earlier and tell everybody that more earnings must be retained.
“As it happened it looked like last-minute stuff.”
Fonterra Shareholders’ Council chairman Duncan Coull said the board’s rationale and prudence are understandable but the situation is unacceptable.
Creating long-term value is a key responsibility for directors and along with management they face challenges in rebuilding confidence and prudently managing shareholders’ capital.
