John Candy's title character in 1989's Uncle Buck had the right idea, at least as far as smokeless tobacco giant UST (NYSE:UST) is concerned.

"Hey, I stopped smoking cigarettes. Isn't that something? I'm on to cigars now. I'm on to a five-year plan. I eliminated cigarettes, then I go to cigars, then I go to pipes, then I go to chewing tobacco, then I'm on to that nicotine gum."

In this year's annual earnings report, UST noted that the plans it put into place last year to attract some of America's 50 million smokers to switch to smokeless tobacco were well ahead of its original expectations. UST points to a growing segment within the public health community that says that a switch to smokeless tobacco is a pragmatic strategy for smokers to continue enjoy tobacco products without the same level of health risk posed by cigarettes. The Institute of Health calls smokeless tobacco a "Potential Reduced-Exposure Product." UST CEO Vincent Gierer pressed this point further in the company's conference call today (accessed courtesy of StreetEvents), stating, "There has been significant progress in the last two years as many in the scientific community and policy-makers acknowledge that there is a difference in the comparative risk between smokeless tobacco and cigarettes."

Last year, UST's annual report included information about the strategy the company formulated to attract current cigarette smokers to its smokeless dry and wet tobacco products. UST has long trumpeted what it calls "harm reduction" strategies for smokers, and this year they seem to be paying off. Smokeless Tobacco Division President Murray Kessler believes that UST, in part as a result of this initiative, should see "record results in 2005."

Think about it this way: There are approximately 10 times as many cigarette smokers in the U.S. as there are smokeless tobacco users. A relatively small percentage of smokers converting to smokeless tobacco generates a substantial positive impact for the smokeless companies, of which the dominant by far is UST, with others including Conwood and Swedish Match. So while Altria (NYSE:MO), Reynolds (NYSE:RAI), and the other cigarette companies will continue to have their products framed as the "problem," UST seeks to be part of the solution.

The record results that Kessler is confident will happen in 2005 would mean the company would have to beat its record results for 2004. UST turned in the highest total sales and net earnings in its history, with total sales for the year exceeding $1.83 billion, and earnings coming in at $3.19 per share. The company's premium brands saw a slight decline in sales volume, while its "value" brands rocketed by more than 20%. As Kessler noted in the conference call, UST suffered no erosion in gross margin even as its mix of sales shifted more toward its lower-price products.

For the past two years, UST's cash flows have been hit hard by enormous litigation costs, the first from an antitrust suit by competitor Conwood, the second from a similar case by Swedish Match. In 2004, if we add back the litigation expense, UST generated more than $770 million in operating cash flow and $700 million in free cash flow. For a company that is dominant, has the capital structure and aggressive share buyback and dividend policies (combined $544 million in 2004), and astounding business economics, the fact that it only trades at a multiple to free cash flow of 11 is astounding.

UST is the dominant company in its segment, so it is of course probable that even successful marketing might bring threats of antitrust, but it is extremely unlikely that the big hits of the last two years will be repeated any time soon. As well as UST has done, its shares still might not fully reflect its earnings power.

We just wish Uncle Buck were here to see this.

Guess what? Bill Mann owns shares of UST. The Motley Fool has a disclosure policy . For other companies that pay you to invest, consider a trial subscription to Mathew Emmert's Income Investor newsletter. Tell you what, you can have the trialfor free!