Will a2 Milk ever pay a dividend? Photo / File
More than $10 billion has been wiped off the value of a2 Milk since the company unveiled a series of earnings downgrades over 2020 and 2021.
What was behind its dramatic fall from grace?
And now that the former higher flier appears to be on more modest trajectory, should the company still be considered a "growth" stock?
More to the point, now that a2 Milk will soon be joining the manufacturing ranks, isn't it time it started paying a dividend?
These are the questions put to Harbour Asset Management senior analyst and long time a2 Milk follower Oyvinn Rimer in this episode of Continuous Disclosure, a podcast hosted by the Herald's business reporters with support from Fisher Funds.
A2 Milk's share price has a plummeted since peaking at $21.51 in 2020, trading these days at around just $5.00. Why?
"My view is that a share price reflects the earnings prospects of a company and it was quite a brutal stop to a2 Milk's earnings growth during the Covid era," Rimer says.
When Covid first appeared, consumers in China stocked up their pantries.
A2 Milk was initially swept along by this trend of higher sales, which encouraged the company to up its orders from supplier Synlait Milk.
At same time other players were scaling back their production because they realised there would soon be an inventory problem.
Then came the impact on the daigou channels. Travel bans put an end individuals taking product back to China and couriering stock back home became nearly impossible.
"So it was a double whammy of sorts and it's taken a long time to iron out."
Then there was the re-emergence of the Chinese domestic companies who won back the trust of consumers after the infamous melamine scandal of 2008.
Perhaps most important factor for all the infant formula producers to face has been China's declining birth rate, which hit a record low in 2021.
Rimer says the declining birth rate will be a challenge for all the infant formula makers selling product in China - the world's biggest market.
A2 Milk offers product in stages one through to four.
Stage four is consumed generally by children in the 3 to 6-year-old bracket.
"With the birth rate being so poor as it was in 2021 it puts a drag on the next six years of those babies for all the infant formula companies.
"It's a tricky situation which means that increasing your pricing or taking market share from others is going to be the only way to grow from here."
Rimer said a2 Milk's majority owned Mataura Valley Milk manufacturing facility in Southland would give a2 Milk flexibility.
Even after buying Mataura Valley, a2 still has a cash pile of over $700 million.
Rimer says that over time it is reasonable to assume that a2 will become a dividend payer.
"They clearly think that they have option values around the place - be it either more acquisition or supercharging investment in marketing or some additional capex at Mataura Valley."
Once the company is clear of Covid issues, a runway of potential earnings should be clearer.
"At that point, I would expect them to seriously consider a dividend payment.
"Even now in these relatively testing times, cash flow is good and there is this all that cash built up from previous successful years.
"They are spending a fair bit of money on getting growth back up so until they actually see the success or the fruits of that investment - they will probably sight on their hands with respect of a dividend," Rimer says.
"But it I think that it is reasonable, once there is a bit more certainty, to expect some dividends from a2."
Continuous Disclosure is available on IHeartRadio, Spotify, Apple Podcasts, or wherever you get your podcasts. New episodes come out every second Wednesday.
You can find more New Zealand Herald podcasts at nzherald.co.nz/podcasts or on IHeartRadio.
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