There's nothing like a nice, evenhanded title to convey a strictly neutral, dispassionate discussion of a company and its operations, eh?
It's very hard to remain dispassionate when the company keeps turning in monster quarter after monster quarter. UST (NYSE:UST), the largest purveyor of smokeless tobacco in the country, simply churns out great results. It has two divisions: smokeless tobacco and wine, the former being anchored by such dynamo brands as Skoal and Copenhagen, the latter by Columbia Crest and Chateau Ste. Michelle. It has an extremely low need for capital reinvestment and returns capital to shareholders in the form of share buybacks and a robust 5.5% dividend yield. Over the past year, the shares have appreciated by more than 24%.
This morning UST turned in stellar results for its third quarter and first nine months of fiscal 2004. The company's revenues increased 5.5% to $1.36 billion, while operating income increased 6% to $687.9 million. Its share of the premium-branded moist smokeless tobacco market hit a staggering 89.3%. More importantly, net earnings increased 10.7% to $402.6 million and diluted earnings per share increased 11.5% to $2.42. Those are great results for a company whose lines of business aren't exactly high growth. Pay attention to the difference between those last two numbers, for it is the rare company indeed that has lower earnings on a basic share basis than on a diluted one.
How'd it happen that way? Well, the company's share count is lower, based on repurchases this year totaling 3 million shares at a cost of $112 million. That's $37.30 per share on average, well below the current price of $40.50. Each share that the company retires through buyback increases the percentage claim on earnings for each remaining share. Unlike many tech companies such as eBay (NASDAQ:EBAY), where shareholders find themselves owning smaller and smaller percentages of the equity with each successive year, companies that buy back huge numbers of shares (well beyond their level of options dilution) serve to increase the power of each surviving share.
With share buybacks, while the current price is illustrative in terms of determining the wisdom of the transaction, it doesn't tell the whole story. What you want to know is whether or not the company is getting more value than it is paying. In other words, there's nothing redeeming about a company that overpays to buy back its shares. In this case, though UST isn't the staggering value that it tends to be every time some piece of bad news for the tobacco industry comes down the pike, its high margins, low price ratios, and minimal working capital requirements still put it in the fairly inexpensive category. UST has some legal exposure for tobacco cases, but not nearly to the level of the cigarette manufacturers such as Altria (NYSE:MO) or Reynolds American (NYSE:RAI). In this regard, transferring its cigar manufacturing division to Swedish Match (NASDAQ:SWMAY), though it came as a result of settling a lawsuit, will likely be positive in the long run.
See also:
- Bill Mann's A Tale of Two Companies
- Alyce Lomax's Is UST Up to Snuff?
- Paul Elliott's An Investor's Worst Enemy
- Bill Mann's Foreign Threats to U.S. Profits
Bill Mann doesn't smoke, but he doesn't mind when his smokeless company's stock does. He holds shares in UST. Please view his profile for a complete list of holdings.
