FILE PHOTO: The Fonterra Te Rapa dairy factory is seen outside Hamilton March 30, 2016. REUTERS/Henning Gloystein/File Photo

By Roshan Thomas

(Reuters) -Shares in New Zealand's Fonterra hit their highest level in more than seven years on Thursday, after the dairy giant reported stronger annual operating profit across its businesses and declared a record full-year total dividend.

Operating profit across the co-operative's business units rose, with the ingredients division posting a 17.4% increase, on the back of growing margins for the improving product mix.

Profit from Fonterra's food service division rose 8.6%, supported by strong volumes and sustained demand.

Its consumer business, which was sold to French dairy major Lactalis last month, recorded a 16.1% increase in normalised operating profit from discontinued operations.

Fonterra declared a final dividend of 35 New Zealand cents per share, lifting its total payout for the year to a record 57 NZ cents, up from 55 NZ cents apiece last year.

Shares of the Auckland-headquartered firm rose by 1.7% to NZ$6.10, their highest since early-February 2018.

"In the medium-term, if product mix upgrades and capacity projects land on time, earnings can rebuild toward FY25 levels in about three years," said Jeremy Sullivan, investment advisor at Hamilton Hindin Greene.

The co-operative also revised its forecast milk collections for the 2025-26 season to 1,525 million kilograms of milk solids (kgMS), up from the previous estimate of 1,490 million kgMS.

It reported collections of 1,509 million kgMS for the year ended July 31.

Fonterra, however, posted a 4.3% drop in its full-year profit after tax of NZ$1.08 billion ($627.8 million) hurt by a higher tax expense after changing how it treats farmer shareholder distributions.

The higher tax expense in fiscal 2025 followed Fonterra's decision to stop deducting distributions to farmer shareholders from taxable income, opting instead to attach imputation credits to dividends, a mechanism used to avoid double taxation of the company's profits.

The company also added it expects its normalised earnings per share in fiscal 2026 to range between 45 and 65 New Zealand cents, down from 71 NZ cents reported for the current year.

"Global dairy trade prices continue to be robust," CEO Miles Hurrell said.

"However, the risk of potential volatility in commodity prices and exchange rates from geopolitical dynamics remains."

($1 = 1.7203 New Zealand dollars)

(Reporting by Roshan Thomas and Jasmeen Ara Shaikh in Bengaluru; Editing by Krishna Chandra Eluri, Sam Holmes and Lincoln Feast.)