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Debt Policy at UST Inc
Debt Policy at UST Inc
UST Inc.
B.B.Chakrabarti
IIMC
THE ISSUE
UST planning a major change in capital
structure via a debt-financed stock
repurchase program
Dec 98
UST Board approved a plan to borrow $1
billion over 5 years
UST - BACKGROUND
175 year old company
Dominant producer of moist smokeless tobacco
Uninterrupted cash dividends since 1912
One of the most profitable American companies
5-year ROCE of 92.1%
Increasing EPS and Share price
P/E ratio = 13.8
SMOKELESS TOBACCO
MARKET (1998)
$2 bn in retail revenue
5 mn consumers of moist smokeless
tobacco
7 mn consumers of chewing tobacco
Moist smokeless tobacco fastest growing
segment at 3.7% annual growth over past
17 years against 2% annual decline in
cigarettes
UST and COMPETITION
UST Ph. Morris Median-ex UST
GPM 80.1 41.7 28.0
NPM 32.9 10.3 2.7
ROE 103.4 49.3 22.5
ROA 53.8 13.2 3.1
Debt/ Mkt Eq. 1.5 10.1 49.8
EBITDA Int. Cov. 105.6 12.7 4.1
Debt Rating A
LITIGATION and LEGISLATIVE
ENVIRONMENT
Litigation and legislation are everyday
occurrences
7 pending health related lawsuits (98)
UST to pay $100 - $200 mn over 10 years
as part of Smokeless Tobacco Master
Settlement Agreement to settle Medicaid
disputes (Nov 98)
Lawmakers to continue to push new laws
against tobacco use
UST – FINANCIAL RESULTS
5-Yr CAGR 10-Yr CAGR
Net Sales 5% 9%
EBIT 6% 11%
EPS 9% 13%
GPM 79.7% 77.3%
NPM 32.7% 31.3%
ROE 122.8% 89.1%
Div Payout 61.6% 51.4%
WALL STREET OUTLOOK
In late 98, analysts maintain neutral rating on UST.
Reasons
- Continued threat of price-value competitors
- Softening smokeless tobacco market
- No international expansion
- Lackluster performance of non-core operations
- Public and political sentiment against tobacco
UST – ATTRIBUTES and RISKS
VIEWPOINT OF BONDHOLDER
Brand Name and Market Position
- Dominant Producer with 77% market share
- Largely insulated from competition due to
advertising restrictions