Fonterra heads towards a rare double – a high dividend and a record milk price

Fonterra is heading for strong earnings in 2025 after reporting an improved first-half result.

Fonterra looks set to record what has in the past been elusive – a high annual dividend coupled with a strong milk price.

The dairy giant today reported an 8% lift in first-half net profit to $729 million, increased its interim dividend to a fully imputed 22 cents from 15c a year earlier, and maintained the mid-point of its milk price forecast at $10/kg of milk solids.

The co-op is sticking with its 55-75 cents per share ($885m to $1.2 billion) earnings forecast for 2025, which was upgraded this month when it became clear the first half would be strong.

Fonterra has said it would pay 60-80% of full-year earnings as dividends, up from 50% previously.

The co-op is in the process of divesting its Consumer business – under the Mainland brand – either through an outright sale or via an initial public offer.

“As we look to the balance of the year ahead, we’re focused on maintaining this momentum in performance, while progressing delivery of our strategy, including the dual-track Consumer divestment process which is on track as planned,” chief executive Miles Hurrell said.

High milk prices have in the past acted as a brake on Fonterra’s financial performance because milk is its biggest input cost, creating an “either/or” tension between the two.

But not this time.

Fonterra’s chief financial officer, Andrew Murray, said, “It’s good to have the combo.”

Murray told the Herald Fonterra had improved the way it maintains margins when milk prices are high.

“At a macro level, we have really honed in on how we respond to changes in the milk price,” he said.

Andrew Murray, Fonterra's chief financial officer.

“Milk prices are always going to move up and down but our ability to foresee and respond is the most important part,” he said.

“Holding margins while the milk price is going up is not an automatic thing.

“You actually have to be quite active to make that happen, but we have developed that space to be able to do that.”

In the co-op’s Ingredients business, Fonterra’s ability to use its hedge book to lock in margin meant it was able to hold on to its margin for longer.

Murray said a high milk price and a high dividend need not be mutually exclusive.

“Certainly in the past it has been ‘either/or’.

“But there is still plenty of volatility out there that can impact on both earnings and the milk price.”

The first-half result showed a cash outflow of $2.069 billion, up from just $397m in the previous first half, mostly reflecting advance payments to farmers made earlier in the season.

Murray expected free cash flow to normalise toward the end of the financial year.

Commenting on Consumer’s result, Murray said it was a resilient performance. Within that, the Australian business performed strongly.

Fonterra’s Ingredients business was a highlight over the half – sales volume fell by 3.9% but operating profit was up by $229m to $696m, reflecting better margins and improved product mix.

The Foodservice channel had sales volume growth of 8.3%, with second-quarter gross margins significantly more than the first quarter as pricing adjusted to the higher milk price.

Foodservice’s operating profit for the half was a healthy $230m, compared with the record high of $342m in FY24 when input costs were much lower.

The Consumer channel saw sales volumes up 8.5%, and margin growth, despite the higher farmgate milk price, with operating profit largely flat on the prior period at $173m.

Forsyth Barr senior analyst Matt Montgomerie said it was a strong first-half result, with Ingredients being the standout.

“Again the under-performance of Consumer, relative to the other segments, adds substance to Fonterra’s decision [to sell], but the earnings growth is also quite positive for them,” he said.

Fonterra’s NZX’s units rallied by 10c to $5.75 – their highest point in over two years – after the result.

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.