Submitted by: Submitted by zzway00
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Category: Business and Industry
Date Submitted: 09/21/2011 08:45 PM
DEBT POLICY AT 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
Net Sales EBIT EPS GPM NPM ROE Div Payout 5-Yr CAGR 5% 6% 9% 79.7% 32.7% 122.8% 61.6% 10-Yr CAGR 9% 11% 13% 77.3% 31.3% 89.1% 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 Cash Flow Generation - Cash cow Expected to...