A2 Milk Company Ltd (ASX: A2M) shares are ending the week on a high.
In morning trade, the infant formula company's shares are up 18% to $5.70.
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Why are A2 Milk shares ending the week with a bang?
Investors have been scrambling to buy the company's shares this morning after it released a trading update ahead of its annual general meeting.
According to the release, business has been stronger than expected during the first half, which has led to a revenue guidance upgrade.
But the bigger news is that A2 Milk is finally going to start sharing its profits with its shareholders. After sitting on a mountain of cash for some time, the company has decided that now is the time to pay dividends.
Revenue guidance
Let's start with its revenue guidance upgrade. Management advised that year to date trading is ahead of plan and the guidance it provided in August. This is primarily due to a significant increase in MVM external ingredient sales compared to plan.
This is being driven by higher global dairy Ttade prices, currency impacts, and changes in product mix. However, this is expected to have an immaterial impact on EBITDA and a slightly dilutive impact on gross margin and its EBITDA margin.
Outside this, management notes that English Label infant milk formula (IMF) sales and Liquid Milk sales are slightly ahead of plan year to date.
In light of the above, the company is now forecasting mid to high single-digit revenue growth in FY 2025 versus FY 2024. This compares favourably to its previous guidance of mid single-digit growth.
A2 Milk's EBITDA margin as a percentage of revenue in FY 2025 is still expected to be broadly in line with FY 2024. This includes its first half margin being down and its second half margin being up compared with the prior year.
Dividend policy
While the above is positive, the main thing driving A2 Milk shares higher today is likely to be the establishment of a dividend policy.
The company notes that its dividend policy targets a payout ratio range of between 60% and 80% of net profit after tax excluding non-recurring and other items (normalised NPAT).
This dividend policy commences immediately and the first interim dividend is expected to be declared in February 2025 with a payout ratio of 60% of normalised NPAT. The company also advised that it would consider special dividends in time, once it has executed its strategy and risk mitigation.
If A2 Milk had paid out 60% of its earnings per share in FY 2024, it would have meant a dividend of 12.6 cents per share. This equates to a 2.6% dividend yield based on yesterday's close price.
The company's chair, Pip Greenwood, said:
The a2 Milk Company has made considerable progress in developing its operating model and creating a more resilient business.
Given this progress and our strong balance sheet position, the Board believes the time is right to introduce a dividend policy that delivers sustainable cash returns to shareholders over time.
Commenting on the dividend policy, A2 Milk's CEO, David Bortolussi, said:
I am pleased to introduce The a2 Milk Company's first dividend policy to reward our shareholders for their support over many years and to reflect the significant progress made since we announced our refreshed growth strategy in 2021.
