Linear Technology Corporation Payout Policy

Linear Technology Corporation Payout Policy

Linear Technology adopts a mixed payout policy with the utilization of both cash dividend and stock repurchase.

CASH DIVIDEND

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OVERVIEW

The company has consistently paid their quarterly dividends, as well as increased its accumulative annual dividends over the past ten fiscal years. The firm’s latest quarterly dividend on a split-adjusted basis has increased at least seven times compared to the initial divided paid back in 1993. Such increase is, in essence, parallel to Linear Technology’s earnings per share growth in the past decade. It has averaged a payout ratio between 10-15% since it initialled its dividend payout. This level of payout is considerably low compared to the overall stock market, yet much higher than most companies listed in the Semiconductor Index on SOX. The dividend yield has been above the average of S&P 500 Information Technology companies for most of the time.

POLICY RATIONALE

Willing and being able to pay sustainable dividends over numerous years signals the market that the company is financially strong and optimistic about its prospect over the coming years. This payout policy is backed by Linear Technology’s lucrative cash position and continued positive cash flow since its initial public offering. The firm also aims to create an image that the company is not as risky and volatile as other technology firms in terms of stock investment opportunity, by guaranteeing a stable dividend payout. The management believes that such level of payout ratio allows the company to maintain sufficient amount of cash reserve for future research and development. Meanwhile, committing itself to paying a dividend can entice a new type of investors that is attracted to having income gain in addition to capital gain, exploiting the stock clientele. Furthermore, the company refuses to reduce its actual dividend payout even during economic downturn. The negative signal effect of cutting dividend was certainly taken into consideration.

OUTCOME

In return, the market has placed the company in a higher category in contrast to other technology firms on the stock exchange. This is due to, in particular, the low-interest environment that the market is currently experiencing, resulting in undesirable cash returns. Keeping the payout ratio within the bracket allows investors to anticipate the dividend payout each year as well as to comprehend the firm’s capital structure and its liquidity. However the extraordinary payout during 2002 definitely put more pressure on the firm’s finance.