Ust Inc

4.

Ust Inc. had been paying very high dividends to their shareholder since 1912 to 1988. High dividend payment had been going on without any concerns due primarily to the fact the UST Inc. had been performing really well in terms of earnings in smokeless tobacco industry (far better the industrial average performances). Furthermore, they had been very conservative by holding a very low debt level. They were not required to make a large amount of interest payment which made them be able to have high net income & cash dividend payment.

In 1999, Ust Inc. decided to issue $1 billion debt for repurchase their own stock. However, shareholders were concerned whether the significant change in company’s capital structure would hamper the dividend payments. As the debt amount gets higher, the interest expense would correspondingly be higher. Thus, it would lead to decline in net income and free cash flow available to the company.

In order to assess the ability of company to make dividend payments, we should look at the company’s  Free Cash Flow to Equity. Based on the assumption that we made using the moving average, we arrived at the amount of cash flows available which are always bigger than the total dividend payout. Although the total dividend payout of the company only increase slightly from year 1988 to subsequent years, it was shown significant improvements in DPS and Dividend payout ratio. This is due to the fact that the company had repurchased the stocks, which reduced the total amount of outstanding stock. Therefore, it increased DPS and the payout ratio.

In conclusion, the implementation of the recapitalization by UST Inc. will not hamper the future dividends payments. And the high dividend payments traditions should be maintained by UST Inc. to ensure the shareholders that the company is performing well and also not to worsen the Wall Street Journal expectations towards UST Inc.