Dividend Policy at Linear Technology

Dividend Policy at Linear Technology
Of the 16 companies on the SOX index, six paid dividends and Linear Technology is one of them started at the second quarter in 1993 which is 5.3 million in total. However, in the case, according to Coghlan, “The quarterly dividend was initially set at $0.05 per share. This amounted to $8.3 million, or 15% of FY 1994 earnings.” And their most recent dividend in 2002(cause in the exhibit2, there’s only threes quarter’s data in 2003, so that’s why I choose 2002 as the last year), the dividend was $0.17 per share amounted to 54 million total. Through out the decade, the company’s dividend generally increased and so did share repurchase except 1997 and 2000 which is 11.6 and 0. Their cash flow almost connected positively with their dividend except year 1999 and 2002. Because during these two years, company spent large amount of money repurchase their stock and left few cash. Linear bought back their stock when they believed the price of the stock was undervalued. One thing for sure for the Linear, they got excess cash. Based on the balance sheet of 2003, positive cash flow could faster the development of the company but they also need to suffer the extra tax. For example, in 2003, the company got 1565.2 million of cash sitting on the balance sheet. And today, Chase provides the one year regular saving rate with 0.01%. Thus, the extra tax would be: 15652000000*0.01%*38.6%=60,416.72. And also, the company failed to involve the benefits of interest tax shield of debt financing. The company conducted a 100% stock dividend which is also called 2:1 stock split. And to solve the extra money problem, Linear could return some of the cash to the stockholders through special dividend or share repurchase. If Linear paid out all its cash as a special dividend, then, To resolve this issue, Linear could return some of this cash to its shareholders via either a special dividend or a share repurchase. If Linear paid out all its cash, then the share price will decrease by: 1565.2m/ 312.4m=5.01 per chare, because market value will drop the same amount with the cash flow output. But the dividend will increase 47 million in order to compensate the stockholder for the loss of the share price. Earning per share will changed by 47m/312.4m=0.15 per share. However, if the company decided to repurchase the share, (share price is 30.87), the market value of Linear will drop by 1565.2 million and the share outstanding will be 312.4m-(1565.2m/30.87)=312.4-5.36=307.04 million. The stock price will decreased by 47m/307.04m=0.153. Return cash by paying dividend can also imply the invstors that the company growing rapidly and can generate profit. And some of the investment company only invests the companies with dividend payment, which means the investment company also consider the firm with dividend payment as reliability. But sometimes, the manager also worried about paying dividend would cause the price dropped because investor would see dividend payment as a signal of declining the price. It is highly recommended that the company should payout the excess cash as dividend partially and maintain sufficient cash to the capital expenditure just in case the company got negative cash flow in the next several periods. Again, even though paying out as dividend can largely benefit the company，the company should also need reserve some cash.