Ust Inc

Debt Policy at UST Inc.

Finance 430

UST Inc. has many positive attributes that have led to its past success and that will allow it to have continued success. UST is the leading producer of moist smokeless tobacco, holding 77% of the market. The company is widely known for its conservative debt policy and high dividend payout. In December 1998, UST Inc.’s board of directors approved a plan to borrow up to $1 billion over five years to accelerate its stock buyback program. UST was a major player in the overall expansion of the moist smokeless tobacco industry, primarily through product innovations. UST has been aggressive with its price increases, which allows them to have large margins on their products and contributes to their continually large profits. The overall financial situation of the company is extremely positive. The company had a 5-year return on capital of 92.1% and was the most profitable American company in terms of ROA, ROE and gross profit margin. Such operational statistics indicate UST compares very favorably to the other tobacco firms and suggests that their operating model is very successful and will allow them to continue to succeed in the future. The fact that UST has been ahead of other tobacco producers in negotiating settlements to lawsuits will reduce some future liability as this has already been dealt with. This gives UST more certainty as to its liability position than many others in the industry.

Primary business risks of the tobacco industry involve litigation and legislation occurring frequently, and anti-smoking/tobacco campaigns. The tobacco industry has been involved in numerous health related lawsuits and litigations. In November of 1998, the industry agreed to settle state Medicaid lawsuits with a $206 billion settlement and a ban on advertising and promotions directed at youths. Separately, UST signed the Smokeless Tobacco Master Settlement Agreement to settle its Medicaid disputes. UST was the only major...