Debt Policy at Ust Case

Debt Policy at UST Case Questions

Group members: Wei-Ting Liao; Cong Ren; Gerald Nyiti; Beidan Wang

1- ) Give a brief summary of the company background

UST Inc. is a smokeless tobacco company which enjoyed a long tradition and a recognizable brand name. It is the leading producer of moist smokeless tobacco products and widely known for its conservative debt policy and uninterrupted cash dividend payout since 1912.

The company is the major player in U.S. smokeless tobacco market. For example, it holds the maximum market share (77%) as a whole, and dominates especially in the growing segment of moist smokeless tobacco. Additionally, it has widely recognized brand and competitive positon in the market by constant innovation and new product innovation. Finally, UST has historically been one of the most profitable companies not only in the smokeless tobacco market but also in the corporate America.

Although the above advantages, UST now faces with continuous threat from price-value competitors, a softening smokeless tobacco market, investors’ concern about over-investment on non-core operations and negative effect of public and political sentiment towards the tobacco industry.  

2- ) Evaluate UST’s attributes/Risks from view point of bondholder

The following factors weave into the risks and attributes of the company from the creditors’ point of view (“☑” and “☒” represents advantage and disadvantage, respectively):

☑ Widely recognizable brand Name

UST has widely recognized brand. We can see from the Table B of the case, the 1998 market share of the top moist smokeless tobacco brands, only one brand is not from UST. In addition to this, UST combat entrants by launching similar products, rather than cutting prices. New product introduction and success in the market demonstrate UST’s strong pricing ability result from the well-known brand.

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☒    Threatened market Position

UST is a dominant player and market leader but the recent market erosion by small companies has raised concerns. And UST’s “counter attack” has not been effective in competing against price-value brands. The resignation of his CFO and President of tobacco unit further raise the uncertainty of the company’s efficiency of solving the market erosion problem.

☑    Historical strong cash generating ability

Tobacco industry is famous for its strong cash generating ability and UST has performed even better than the industry during the period of 1988 to 1998. We can see from the Exhibit 3 in the case, despite of the decrease in cash flows in 1997, UST posted continuous increase in cash flow with a compound annual growth rate of 12%. Also, in Exhibit 6 for tobacco companies’ S&P ratings, the financial ratio of UST are better than the A rating companies. And S&P only give favorable ratings to the highly cash generative nature of the tobacco industry.