Dividend Policy at Linear Technology

Dividend Policy at Linear Technology

Describe Linear’s current dividend policy.

Linear Technology offered its first quarterly dividend of $0.0625 per share in 1992. With the positive cash flows, the management team believed that the company is capable of giving the money back to the shareholders through repurchasing their shares and with cash dividend. Up until 2003 they did 21 stock repurchases; note that from Q2 of 2000 to Q3 in 2003 they had every quarter a stock repurchase.  Also the payout ratio has been steadily increasing over the last decade and they had 4 time shares splits. They started with a payout ratio of 14% in 1993 and in 2003 was increased to 27.8%.

Does the payout ratio of 33.1 % presents any problems for Linear?(Consider the annual income and cash flow of the firm and its cash balances. You may compare it with other firms )

It should not present a problem to the company.  Even tough Operating cash flows have dropped in 2003, from 239.3 to 180.1 as well as the net income,  this company has an ample amount of cash on their books; in fact, it increases from 1552.0 to 1565.2. This means the firm has money that they can offer to the shareholders via repurchasing of share or pay as cash in dividend. Unlike their competition they have managed to implement variable cost structure and this gives the firm a stability in market turbulences.

 Lunar Technologies cash reserve is 16.23% from total market values whereas for Microsoft is 13.1% so they have more cash reserves in relative perspective and  will be able to carry the burden of even higher payout ratio.

The fact is that Linear Technology has so big amount of cash holding with respect to what they actually payout. In 2003 they have cash accumulated $1,565.2 millions and paid out only 47 million in dividends.  In case if they keep the same net income a payout ratio of 33.1% would mean to payout $56,47 millions. They won't have any problems to carry this dividend amount.

What are the tax consequences of keeping cash in the firm? Is there any other factor (disadvantage) you need to consider when the money is kept within the firm?

• There is an accumulated earnings tax on accumulated taxable income of a corporation that is formed solely for the purpose of accumulating income and not distributing to shareholders.
• Excess cash can lead to agency problems if managers are empire-builders
• If there is excess cash balances and increasing cash generation, the excess cash need to be invested or distributed

• Three negative impacts:

• It lowers the firm’s return on assets
• It increases Cost of Capital
• It increases overall risk by destroying business value

What will happen to share price on the announcement date of a dividend payment under the following theories (assume a 1$ dividend payment). Also what will happen to the share price under these scenarios after paying the dividend? (i.e. how much the price will change?)