The Fonterra Shareholders Fund (ASX: FSF) share price is surging higher, up 4.8% in early trade.
Fonterra shares closed yesterday at $2.75 and are currently trading for $2.88.
This comes as the dual-listed dairy cooperative announces a major share buyback.
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What was the share buyback announcement?
Fonterra shares are leaping higher after the company reported it is earmarking up to $50 million for an on-market share buyback program. The buyback is set to start at the end of the month, on 30 June.
The company said the buyback could run for as long as 12 months, with Fonterra buying shares at market price.
During that time Fonterra said it "will continue to assess market conditions, its prevailing share price, available investment opportunities and all other relevant considerations". Management retains the right to halt or cancel the program at any time.
The company will cancel all the shares its buys back. This will reduce the number of shares on issue, which should offer a tailwind for Fonterra stock.
Regulations limit the maximum number of shares the company can acquire to 5% of Fonterra's shares that were on issue 12 months ago. That works out to just under 80.7 million shares. That number also includes the $300 million on-market buyback (the 'Transitional Buyback') Fonterra announced last year to help the transition to a Flexible Shareholding capital structure. That process is still pending.
Regarding the new program, management believes the stock is undervalued at current prices, driving its decision for the buyback.
"The Co-op considers the prevailing price, particularly since late April, has undervalued Fonterra shares, which is a key reason for announcing this buyback," Fonterra chair Peter McBride said.
Fonterra share price snapshot
The Fonterra stock has struggled this year, down 19% since the opening bell on 4 January.
That compares to a year-to-date loss of 7% posted by the All Ordinaries Index (ASX: XAO).
At the current price, Fonterra shares pay a 5.8% trailing dividend yield, unfranked.
