Debt Policy at Ust Inc.

Topics: Stock market, Stock, Dividend yield Pages: 3 (930 words) Published: December 1, 2012
Executive Summary
Holding nearly 80% of the market share in the smokeless tobacco industry, UST Inc. has been generating large and stable income. However, the leading company in a certain industry tends to react slowly to market share erosion by competing firms and lack of creativity in the introduction of new product, a situation UST Inc. is now undergoing. Concerning the declining sales growth and gradual loss of the market share, UST Inc. is now considering recapitalizing by issuing debt amounts to $1 billion. By recapitalizing, it can create a total $380 million interest tax shield to add up firm value and, at the same time, make shareholders better off by using the proceeds from the issuance of debt to buyback outstanding shares. Although declining sales growth and litigation problem might be hidden concerns for UST Inc. , after some analysis about the attributes of the company such as business risk, capital structure as well as payout policy, I still believe that UST Inc. is heading toward the right direction. And we can also observe that, after the adjustment of capital structure, its traditional dividend payout policy will not be hampered in the near future.

Analysis of Business Risks (from bondholder’s viewpoint)
Bondholders only care about the ability of the company to make interest payments and whether they can get the face value when the bond matures. Therefore, we have to consider the factors that contribute to the amount and stability of future EBIT. In the situation of UST, several factors have more of an impact on the company’s business risk, such as sales growth, competition faced owing to other competitors’ erosion into their market share and the effect of litigation problem and government regulations.

Since the smokeless tobacco are considered less harmful to health and increased prevalence of smoking bans, demand of smokeless tobacco has undergone a continued growth, which would contribute good prospect to UST since its...
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