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Debt Policy At Ust, Inc. Essay

1158 words - 5 pages

Brantley JacksonJames JeffersonRyan HerringtonScott JangDebt Policy at UST, Inc.UST, Inc. is a leading producer of moist smokeless tobacco. UST has a very respectable market share of 77%. To date the firm has had a conservative debt policy, relying mostly on equity. The equity holders have benefited greatly over the years with a high dividend payout. In the beginning most of UST's success can be credited to product introductions and innovations, however, lately the firm has not been as productive in these areas. Also, UST's market share has begun eroding due to low-price value competitors. Although the company is experiencing these troubles a plan to borrow up to $1 billion is currently being considered. The proceeds will be used to accelerate its stock buyback program.In addition to the issues stated above, UST is also faced with a number of business risks. These risks include lawsuits, scientific research, geographical diversification, and the recent resignation of the President and CFO. UST had seven pending lawsuits at the end of 1998. The outcomes of these lawsuits are indefinite. Other litigation against tobacco companies is expected to continue, especially lawsuits filed by individuals. Although scientific research has not directly linked the use of smokeless tobacco with cancer, it is unknown if further research will provide such results. It is also expected that a cultural shift against smokeless tobacco is likely. This is detrimental to the company primarily because UST has no immediate opportunity for international expansion. UST's President and CFO both resigned from the company, in 1997, due to philosophical differences about the strategic direction of the company. All of these risks contribute to the overall uncertainty of future cash flows of UST, Inc.UST's financial ratios and other financial statistics appear to be preferable by bondholders. For 1998 the firm's profit margin, return on equity, and return on assets are 80.1%, 103.4%, and 53.8%; respectively. These numbers can be compared to the group medians of 28%, 22.5%, and 3.1%; respectively. UST's debt-to-equity ratio is a mere 17.6% when compared to the group median of 66%. Other than decreases in earnings and cash flow in 1997, UST posted continuous increases in sales, earnings and cash flow over the entire period from 1988-1998. In 1998, UST did not have an interest expense in fact, an interest income of $2.2 million was earned. Although UST was able to introduce price increases rather regularly early on, they are currently facing issues with their pricing power. This is due to value competitors. As stated above, UST controls 77% of the market share. UST has also benefited with profits from strong brand name recognition. UST recognized the importance of product diversification by manufacturing wine and cigars in addition to smokeless tobacco. However, UST is not well diversified geographically. The firm has no intentions of expanding internationally. The S&P views the...

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