The main purpose of the report is to make a decision for Linear Technology on dividend policy. The report analyzed the impact of changing future dividend policy on the value of the company, based on its historical performance, financial history and market trends.
Linear Technology is a large-scale company which focus on the analog segments within semiconductor industry. It went public in 1986 and announced its dividend policy on 1992. Nowadays, under the market environment where dividends are unwilling to be paid, Linear still insisted its dividend commitment.
Now Linear Technology is experiencing some difficulties with its profits that its quarter sales number in 2003 was far below that in last fiscal year, despite some growth. Changing dividend policy under such circumstances, therefore, will bring problems such as destroying investment opportunities and affecting executive stock options.
In order to seek solutions for Linear Technology, this report will balance pros and cons of dividend change. The main purpose of the analysis is to find out whether Linear Technology should increase its dividend payout.
Linear Technology’s Payout Policy
The payout policy of Linear Technology can be concluded into two elements: dividend payment and repurchase activities.
To maintain competitiveness, Linear paid a dividend for about 10 years. It first initiated a quarterly dividend of $0.00625 per share in 1993. The payout ratio is closer to 25% to 30% consistently during these years. Dividend yields various from 0.03% to 0.25% unevenly for the price per share is fluctuated. Dividend per share rises from $0.00625 in 1993 to $0.05 in 2003. And since 2000, the dividend begins to growth by $0.01 in every four fiscal quarters. During the decade, it seems Linear’s dividend policy goes less volatile, which may broaden the client base and somehow shows the desire of the company to be recognized as a more mature and confident.
Besides, the linear start to repurchase its stock intensively in 2001. The repurchases per year unevenly distributed from $0.06 to $0.36 in every fiscal quarter. This frequency in repurchase may be a signal indicates that manager view their stock price is undervalued.
What are Linear’s financing needs?
Linear’s capital expenditures remained under $40 million in most of years from FY1992 to the first quarter of FY2003, except in FY1996, FY2000, FY2001 in which the capital expenditures stood at relatively high level . Linear had positive net cash flows from FY1992 to the first three quarter of FY2003 and large cash balance, more than $1.5 billion in FY 2001, FY2002 and the first quarter of FY2003 respectively. The company should make a consideration on how to use and allocate the large cash balance to enable the company to sustain the well position in the industry and expand. Since the manager of the company did not plan to make acquisition and acted conservatively on exploring new business in Asia, the company need to find a balance way to allocate the cash to the shareholders. Should Linear return cash to its shareholders?
As Linear established positive cash flow and accumulated a large cash balance, the company should return cash to its shareholders. Linear has returned cash to its shareholders in forms of dividend and share repurchase. Offering dividend can not only help the company to show investors that Linear’s stock is less risky than other technology companies’ stock, but also show the company is confidence to keep growing in the future. Moreover, return cash to shareholders in form of dividend can broaden the company’s invest base, for instance attracting a new set of investors who had income goals in addition to growth goals. In other hand stock repurchasing is also a preferred way for Linear to allocate the cash to shareholders. One of the primary reason is that the company can offset the exercise of employee stock options. Another factor is that the company’s manager consider the return...
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