Sample Answer

Topics: Dividend yield, Stock market, Dividends Pages: 2 (493 words) Published: August 24, 2011
4) UST Inc. has paid uninterrupted dividends since 1912. Will the recapitalization hamper future dividend payments? UST Inc. has paid uninterrupted dividends since 1912. Assess the impact of the plan on UST’s $ dividend and dividend per share, assuming it continues to payout 64% of its earnings as dividends. Exhibit TN-6: Impact of Recapitalization on DividendsDebt = $1 BillionActual 1998Pro-forma 1999 No debtPro-forma 1999 Rd = 7.82Net Income467.9491442.56Shares185.5185.5158.42Earnings per Share2.522.652.79NI/SharesDividend Payout301.1314.2283.24NI*.64Dividends per Share1.621.691.79EPS*.64When assessing the impact of the plan on the $ dividend and the dividend per share, it is clear that the recapitalization plan reduces the total dividend payout from $314.2 to $283.24; however, the dividend per share value increases from $1.69 to $1.79. This is caused in part by the reduced number of shares outstanding as a result of the recapitalization. These assumption are based on the fact that UST continues its’ policy of paying out 64% of earnings as dividends. It is important for UST to continue to uphold this tradition of this dividend payout ratio in order to keep the stockholder’s happy, and to not signal any negative ideas to the stockholders and to Wall Street.

Recapitalization will not hamper dividend payments in the near future. But the effect is uncertain in the long run. Refer to attached spreadsheet. The row titled “Basic Earning per Share” stays higher than the projected “Dividend per Share”, the company can always afford to pay the dividend. However, in order to maintain the dividend stream, the company in 10 years has to face a 83% payout ratio even before the recapitalization. Assume the UST takes the recapitalization, the payout ratio is going to rise to 90%, which will significantly undercut the reinvestment in R&D since R&D is usually the first victim of budget cut in a company. Given the increasingly competitive value sector of the market, a...
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