Linear Company

From the economic perspective, there seems to be two main reasons that would favor an increase in payout for Linear (in either dividends, repurchases, or perhaps both). First, given the decrease in interest rates due to the flight to safety after the crash of the dot com bubble, this free cash would probably be better used to reward the shareholders of the company, given the decrease in income that this cash could have generated for Linear should they have remained their cash in short term debt securities. Second, as President George W. Bush had proposed a radical change to the taxation of investment income in January 2003 (a reduction from the ordinary income tax rate of 38.6% to 15%, allowing capital gains and dividends to effectively be taxed at the same rate), a dividend payment would have faced less of a tax burden than previously enacted before the new policy came into place.From the industry’s standpoint, there also seems to be a number of reasons to favor an increase in payout. First, Linear focuses on the analog segment within the broader semiconductor industry, as opposed to the digital segment. Although both segments require substantial capital investments in order to continuously develop high-performance products, the cost of a new analog fabrication facility was substantially below that of a digital facility (~$200 million vs. ~$2 billion). In addition, analog facilities could be utilized for more than twice the duration of their digital counterparts, thereby allowing Linear to have less of a need to reserve an amount of cash for this purpose compared to their digital competitors. This subsequently allows them to free up additional cash to increase their payout to shareholders.

Second, Linear’s benchmark companies (Intel and Maxim, as defined by Coghlan) also suggest that an increase in payout may be a solid approach to follow. For example, although Intel has not increased its dividend since 2000 (paying $0.02 per share on a quarterly