TO: UST Inc. Investors
SUBJECT: Debt Policy at UST Inc.
ADD INTRO PARAGRAPH
From the viewpoint of the bondholder, UST Inc. has various attributes that make the company a safe, yet sometimes risky investment. Qualities that make UST Inc. a superior investment include their excellent A-1 credit rating and their strong brand name and market position, which has made UST Inc. one of the most profitable companies in corporate America. While their asset tangibility and geographic diversity is average, UST’s below average product diversification, declining volumes, the CFO’s resignation, and high litigation risk makes UST Inc. a somewhat risky long-term investment. Specifically, the uncertainty of various litigation outcomes makes future cash flows risky. While UST Inc. has been very innovative by offering new forms of flavors and spiking prices, smaller players eventually have eroded UST’s market share primarily by cutting prices. While the present risk of litigation is not very high as a result of tobacco products not being tied directly to cancer, uncertainty about what future research will show gives the investors some long-term risk and provides hesitation about the direction of the company to the bondholders. UST Inc. is considering a leverage recapitalization after a long history of conservative debt policy in an effort to make the company’s capital structure more stable and potentially increase the price of their stock. UST Inc. does not want to become a hostile takeover target, so they are taking on a large amount of debt and issuing dividends to shareholders. By issuing more debt and repurchasing stocks, they increase the dividends, which increases the leverage and the riskiness. Increasing the leverage and riskiness would be appealing to risk-loving investors. With more leverage, UST Inc. can undergo a larger tax shield which would be beneficial to them by increasing their profitability. PARAGRAPH 3 REGARDING...
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