Asian Dividend Gems: Fonterra Shareholders Fund

• Fonterra Shareholders Fund's dividend yield was 14.2% in 2023. Its dividend yield averaged 8.7% in the past three years.

• Fonterra Co-Operative Group, is a New Zealand based multinational dairy cooperative. Outside investors who are not allowed to hold shares in Fonterra Co-Operative Group can invest in Fonterra Shareholders Fund.

• In May 2024, Fonterra announced that it plans to sell off its consumer products businesses and concentrate on business to business sales as a dairy ingredients supplier.

Photo by Teo Do Rio on Unsplash

Conclusion First

Fonterra is the number one dairy producer in New Zealand. It has been turning around its business in a major way in the past several years, resulting in material improvement in sales and profits. Fonterra Co-Operative Group, is a New Zealand based multinational dairy cooperative. Outside investors who are not allowed to hold shares in Fonterra Co-Operative Group can invest in Fonterra Shareholders Fund.

In May 2024, Fonterra announced that it plans to sell off its consumer products businesses and concentrate on business to business sales as a dairy ingredients supplier. It is likely to take one to three years to divest major portions of the consumer products businesses. We are positive on this restructuring plan as it is likely to lead to greater focus on its core dairy ingredients business, higher returns on invested capital, and greater returns to shareholders in the form of higher dividends. Valuations are also attractive.

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Fonterra DPS, Dividend Yield

Fonterra's dividend yield averaged 6.9% from 2020 to 2023. The company's DPS ranged from NZD 0.05 to NZD 0.50 per share in the past four years. The company's dividend yield increased from 1.3% in 2020 to 6.6% in 2022, and 14.2% in 2023.

Fonterra Shareholders Fund EPS, DPS, and Dividend Yield (Source: Smartkarma)

Fonterra Dividend per share (Source: Company data)

Fonterra Co-Operative Company Background

Fonterra Co-Operative Group (FCG NZ), a New Zealand multinational dairy cooperative, is a global leader in the dairy industry. Fonterra Co-Operative Group Limited is a publicly traded dairy co-operative owned by New Zealand farmers. A dairy cooperative brings together farmers to market their milk and collectively further the economic well-being of the cooperative’s member-owners.

Fonterra Co-Operative Group was established in 2001 through the merger of New Zealand Dairy Group and Kiwi Co-operative Dairies which were the two largest dairy cooperative in the country at that time. Fonterra Co-operative Group's formation was a strategic move to consolidate New Zealand's dairy industry and enhance its competitive edge in the global market. Fonterra is one of the largest exporters in New Zealand.

Fonterra is the ninth largest dairy company in the world, based on 2022 sales data. There are two other Asian dairy companies that are among the top 10 in the world including Yili (China, ranked number 5) and China Mengniu Dairy Co (2319 HK - ranked number 8).

Fonterra operates under a cooperative structure where its shareholders are the dairy farmers who supply milk to the cooperative. This model ensures that profits are returned to the farmers, aligning their interests with the company's success. Fonterra's operations are divided into several key segments:

• Ingredients: This segment focuses on producing dairy ingredients for food manufacturers and foodservice operators globally.

• Consumer Products: Fonterra markets a range of dairy products under various brands.

• Food Service: Fonterra provides dairy products to the hospitality and catering sectors.

Fonterra has a significant global presence, with operations in over 140 countries. Its extensive supply chain ensures that dairy products reach diverse markets, from Asia and the Middle East to Europe and the Americas. Fonterra's product portfolio is diverse, encompassing a wide range of dairy products, including milk, cheese, butter, yogurt, and specialized dairy ingredients.

Under the Flexible Shareholding capital structure introduced in March 2023, farmers who supply milk to Fonterra need to hold a minimum of one share [of Fonterra Co-Operative Group (FCG NZ)] for every three kilograms of milk solids (kgMS) supplied and can go up to a maximum of 4x their milk supply in shares. Prior to that, farmers needed to hold one share for every kgMS supplied, while the maximum share allowance was only 2x a farm’s milk supply.

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Plans to Divest Consumer Products Business

In May 2024, Fonterra announced that it plans to sell off its consumer products businesses and concentrate on business to business sales as a dairy ingredients supplier. This potential sale is one of the biggest strategic moves by Fonterra in the past two decades.