Three alternatives to Fonterra
By Regan Pearson - December 12, 2012
New Zealand is known for doing a few things well. At the top of the list right now are Hobbits and milk. For investors considering a stake in the success of the former, there is Time Warner (NYSE: TWX), owner of film production company Warner Brothers. Those interested in the latter now have a new fund to consider: milk giant Fonterra’s Shareholder Fund (ASX: FSF).
Fonterra is the world’s biggest exporter of dairy products. Rather than offering shares in the company itself (which are reserved for milk-producing farmers), the unit fund offers ‘economic rights’ to a share of milk payments (dividends). The units were listed on the ASX on 30 November.
At an initial price of NZ$5.50, the pricing came in at the top end of the company’s prospectus guidance, on forecasted net profit of NZ$690 million for the 2013 financial year. Fonterra’s dividend policy aims to pay out 65% – 75% of net profit after tax, but how should this be interpreted by investors looking towards the future? Fonterra Chairman John Shewan notes in the prospectus that “the return on a Unit is essentially dependent on the performance of Fonterra.” The performance of Fonterra can be reflected in both the production level and global dairy commodity prices – similar to a mining company.
However the units don’t include any voting rights and shareholders have no say over how the company is run. This seems appropriate given the structure of the company with farmers as shareholders, but removes the aspect of control investors get as owners of a share in a listed company, however small their holding is. Another point to note is that the units are not backed by a physical asset as is often the case with company shareholding, which could be a further turn-off.
If you fall into this category, and don’t want to invest in the fate of small men with hairy feet and pointy ears, here are some alternative companies to consider:
A well known favourite of Warren Buffett, Coca-Cola Amatil Limited (ASX: CCL) has the benefit of relying on factories and machines, rather than the temperament of Mother Nature. This helps to provide consistency in production and pricing.
Goodman Fielder Limited (ASX: GFF) owns and produces some well-known consumer brands of bread and baking goods. The company has been struggling of late with strong competition and the high Australian dollar, but it has a strong strategy in place to cut costs and turn things around.
Rural services company Elders Limited (ASX: ELD) is a shadow of its former self and has had a hard run the last couple of years. The company’s share price is hovering around all-time lows and it announced a year-end loss to shareholders of $60.6 million earlier this month, an improvement on the loss of almost $400 million in 2011.
Regardless of whether you prefer investing in Hobbits, milk, or Coca-Cola you should always understand what you’re buying. This will help you to know what factors are likely to cause the investment to go up or down, as well as its future prospects. Fonterra may be a perfect investment for some. Others however may prefer the feeling that comes with owning a company backed by assets and voting rights.
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Motley Fool writer/analyst Regan Pearson doesn’t own shares in any companies mentioned. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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New Zealand is known for doing a few things well. At the top of the list right now are Hobbits and milk. For investors considering a stake in the success of the former, there is Time Warner (NYSE: TWX), owner of film production company Warner Brothers. Those interested in the latter now have a new fund to consider: milk giant Fonterra?s Shareholder Fund (ASX: FSF).
Fonterra is the world?s biggest exporter of dairy products. Rather than offering shares in the company itself (which are reserved for milk-producing farmers), the unit fund offers ?economic rights? to a share of milk payments…