Dividend Policy at Linear Technology
FIN610 - 01/31/2012
Lindsay Ramirez / Mavis Yu / Marci McCall / Mohammad Alkhamis / Sarah Spring 1. What do you advise Paul Coghlan to recommend to Linear Technology’s Board of Directors?
We recommend that Coghlan increase the total payout offered to shareholders, keeping the dividend price the same as Q1 of 2003 and simultaneously repurchasing the company stock.
By repurchasing stock rather than offering shareholders a higher dividend, investors will benefit from the comparatively lower capital gains tax (which can be deferred indefinitely) rather than being forced to pay a higher income tax on dividends received. By reducing the total number of shares available, the value of each individual share will increase even amidst flat earnings. The increase in EPS is expected to generate an increase in demand and a subsequent increase in price in coming fiscal quarters.
We also note that the share buyback will productively utilize some of the firm’s 1.5 billion in cash reserves, which do not appear to be earmarked for any other type of investment project that would generate revenue streams for the company.
Finally, we appreciate the flexibility that the share buyback decision will offer the company. Given the discretionary nature of stock repurchases, Coghlan would retain the right to use the company’s cash to invest in lucrative, last-minute opportunities that might offer shareholders better long term value than an immediate share buyback.
Ultimately, we feel that this strategy generates the greatest value for the company’s stockholders and is superior to increasing the amount of dividends paid. 2. What factors should Paul Coghlan most pay attention to in formulating his recommendation?
Factor 1: Coghlan should examine the current and future cash flow to ensure that Linear has the ability to sustainably pay out dividends. As the case states, “[I]nvestors...
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