...Dividend Policy at Linear Technology | Finance 2013 Page 2 of 13 1. Linear Technology’s Dividend Pay-out Policy Linear Tech announced its first dividend in Oct 13, 1992, and paid the first dividend in Q2 1993. The amount of the dividend is $0.00625/share per quarter (adjusted to stock split). The rationale behind the dividend policy is to show investors that owning Linear’s shares is not as risky as owning shares of most technology companies, and on top of that, to attract dividend income investors. Quarterly dividend has been consistently increased every year by an average of 23.52% (Exhibit 1). The highest hike was in the fourth quarter of 2000, where the company increased the quarterly dividend from $0.02/share to $0.03/share (50% increase). Over the time, the average dividend yield is 0.46%. When the share price was at its peak, the dividend yield was at the lowest (0.15% - 0.19%). In contrast, the dividend yield was nearly 1% in the Q1 2003 when the share price dropped to $20.72 (Exhibit 2). Most of the companies in the Semiconductor Index (SOX) do not pay dividend. Linear Tech is one of the few companies that pays dividend, along with Intel, Motorola, STMicroelectronics, and Texas Instruments. Maxim recently announced to start offering quarterly dividend of $0.02 per share, yielding about 0.21%. Therefore, Linear Tech’s dividend yield is comparable to those dividend paying companies (Exhibit 3). Historically, Linear Tech paid out...
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...Dividend Policy at Linear Technology Firms pay dividends for a multitude of reasons, such as the ability to make use of excess cash that stockpiles when a firm lacks enough viable investment opportunities with positive NPVs. Paying dividends can also send strong signals to investors of positive future earnings while rewarding them with immediate cash returns. From the market’s perspective, merely sending statements that a company is financially healthy doesn’t hold much weight. However, when a firm undertakes the costly action of issuing cash dividends, the message the firm sends is much stronger and more believable. It shows a certain level of expected financial stability since the markets expect dividends to be paid out consistently once they have been declared. While dividends have always been a popular way of distributing money to investors there has been a strong decrease in their issuance since 1978. Back then, about two thirds of publicly traded companies in the United States paid dividends. However by 1999 this number dropped to about one fifth of firms. The main reason for the decline was that until the new tax laws in 2003 passed, top bracket taxpayers paid a capital gains rate of 20%, while being taxed at 38.6% on their dividends. Therefore, paying dividends seemed to be an inefficient use of a firm’s cash and made these stocks less attractive to wealthy investors. Instead many firms favored stock repurchases. In addition, the trend away from dividends could be...
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...It has indeed been a hard decision to make, but through careful analysis, I have reached the conclusion that it would be best to keep the dividend as it is now. Before I brief you on the specifics of my decision, I feel the need to provide basic information about our company that surrounds this issue. To be more specific, I am referring to the past decisions on our dividend policy and our financing needs. Even if you are already aware of the specifics, please bear with me as this has played a crucial role in my decision. Our company has generally had two different payout policies: the dividend payout and the stock repurchase. Our company has first started paying out dividends in 1992, when we had good expectations regarding the analog circuits market. The initial price of dividend per share was $0.05, which accounted for only 15 per cent of the total earnings; since then, the payout ratio steadily increased, getting close to 25 per cent in 2003. In terms of stock repurchases, we have sporadically repurchased stocks between 1993 and 2001, in order to offset the exercise of employee stock options. We have since then repurchased stocks quarterly, but with no distinct pattern. Taking both elements into consideration, it can be said that our company’s payout policy has generally satisfied the shareholders by increasing the level of dividends quarterly and managing a large cash balance in a conservative way. Our focus, as you must know, on analog semiconductors has allowed us...
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...Linear's payout policy is comprised out of two elements: dividend payout and stock repurchase. In general, companies decide to payout dividends after transitioning from a high growth stage to mature and stable stage. Linear started paying dividends in 1992. This decision was based on good expectations regarding the analog circuits market and the fact that Linear had a top position in the industry. Also since the IPO, the company had positive cash flows. Thus paying out dividends would signal a strong position in a risky market and the transition to a more mature state of the company. As observed by some investors the technological companies had been just reaching that stage when paying out dividends was possible. The initial dividend per share was set at US$0.05. This amounted for 15% of the total earnings of the company in the fiscal year of 1994. The relatively low level was based on two principles. The first principle was that dividend payout demands a certain respect from investors so in order to send the right signal into the market and attract new investors, the company had to pay dividends. This in turn would mean a thoughtful payout ratio that the company could sustain over time thus leading to the second principle. This states that a low level for dividends would better suit the company in the event of less than expected earnings. In this case the company would not have to cut down or even stop paying dividends. Since 1992, the payout ratio has been growing steadily,...
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...CASO PRÁCTICO: DIVIDEND POLICY AT LINEAR TECHNOLOGY Conceptualización del problema En el 1981 Linear Technology fue fundada por Rober Sawson en California, esta compañía se dedica a diseñar, fabricar y comercializar circuitos integrados. Por capitalización de mercado Linear ocupa el séptimo lugar dentro de su segmento. En 1986 Linear empezó a cotizar en NASDAQ y desde ahí ha dividido sus acciones cuatro veces. Dentro de los datos financieros del año fiscal se destaca el crecimiento sostenido que presenta Linear entre 1992 y 2001, siendo este ultimo año donde se alcanza un nivel muy alto en ventas logrando así unas cifras imposibles de repetir. Dentro de su política de dividendos, Linear paga dividendos y hace la recompra de acciones. La primera la utiliza cada trimestre desde el 13 de octubre de 1992 cuando anuncio el pago de $0,05 por acción. Para el año 2002 la gerencia y la junta directiva de Linear determinaron realizar un aumento en los dividendos, cosa que busco señalar al mercado que Linear era una compañía rentable y que además de esto contaba con un flujo de caja positivo. Todo esto a razón de que la ventas para ese año bajaron un poco mas del 50% en comparación con el año inmediatamente anterior. Reseña del histórico de los dividendos Análisis de los requerimientos de recursos y su disponibilidad en la firma Linear gracias a su estructura de costos variables pudo afontar la caída de ventas que tuvo VER CUADRO Costos y beneficios de la retención...
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...------------------------------------------------- Re: Changes to Dividend Policy at Linear Technology ------------------------------------------------- The purpose of this memo is to provide a recommendation to Paul Coghlan, CFO of Linear Technology, regarding adjustments to the company’s dividend policy. Linear Technology’s current dividend policy yields a higher than average payout ratio and sets them apart from other technology firms. The firm’s financial data for the past five years as well as data from other semiconductor companies was analyzed to support the following recommendation. To appease shareholders and analysts and reduce cash on the balance sheet, Linear Technology should continue the stock repurchase program and increase the 2003 Q4 dividend to $0.06 per share. What does Linear Technology do? Linear Technology’s business focuses on high-performance analog integrated circuits with a business model of a complete analog focus and cream-skimming the high-margin part of analog. Linear Technology uses a low-maintenance model with a variable cost structure. It designs, manufactures and markets its broad line of products for major companies. The competition in the analog segment is fierce, with companies like Maxim, Analog Devices and National Semiconductor leading the market. Maxim is the closest competitor in terms of size and financial performance. How has Linear Technology done? Linear Technology has done wonderfully until the end of 2001, thanks to...
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...Dividend Policy at Linear Technology from StudyMode 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...
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...policy, or the means by which cash is returned to shareholders via cash dividends or share repurchases, is of critical concern for financial managers because of disagreements between management, investors, and financial academia on optimal policy. Payout policy decisions are often based upon key factors such as industry trends and behavior, decisions of benchmark competitors, and the predictability of future cash flows and sustainability. Linear Technology uses regular quarterly dividends, and share repurchases as opposed to special dividends to maintain their target payout ratio. Finally, Linear appears to smooth dividends with dividend growth as opposed to a traditional residual policy. As proposed by Modigliani and Miller, choices in dividend policy do not have an effect on firm value under the assumptions of fixed capital investment and debt policy. The model is extended to further prove the irrelevance of stock repurchases when adhering to the cash flow constraint. Finally, the concept of homemade dividends whereby an investor can duplicate a desired payout policy by selling or reinvesting shares enforces irrelevance from an investor. Theoretically, the irrelevance of payout policy on firm value should downplay the controversy of such decisions. Thus policy controversy and decisions are often the result of agency problems, signaling, and clientele effects. Applicability of these theories to Linear is discussed in the next section. Members of the technology industry...
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...Question 1: Describe Linear Technologies payout policy. What have they done historically? How does this compare to the dividend policy of other firms in the industry? Payout Policy: * 2 Methods: Dividend Payout and Stock Repurchase * First announced in 1992, due to positive expectations, had a top position in the industry and positive cash flows since the IPO * Signal a strong position ina risky market and the transition to a more mature state of the company * The payout ratio has been growing steadily, getting close to 25% in 2003 Why they payout? * Low interest rates offered by Linear’s High-grade securities * Investors can earn more with the dividends on their own * The company has no acquisition plans * Repurchases offset the exercise of employee stock options Question 2: What are Linear’s financing needs? How large is the dividend relative to its cash level and to the annual cash flow and investment spending of the firm? * Income statement and revenue growth stable during 1992-2002 * Boom during peak in 200-2001 (dot-com bubble) * Even in economic downfall, managed to obtain a positive net income and net cash flow * Also maintained margin with focus on variable cost * Analog semiconductors have stable and modest R&D costs, don’t need much financing * Little desire for excessive investments, cash is handled conservatively with investments in short-term debt securities Therefore: *...
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...As an investor yourself, would you rather a firm pays you a lot of dividends or would you rather simply earn capital gains? In other words, would you rather your return for investing in a firm’s stock come from quarterly cash dividends or stock price appreciation? Why? If I had to choose dividends or stock price appreciation, I would prefer a stock repurchase. When a company buys back shares, investor`s ownership percentage rises without any tax consequences. Unlike a cash dividend, a stock repurchase gives the decision to the investor. An investor can choose to tender his shares for repurchase, accept the payment and pay the taxes. With a cash dividend, a stockholder has no choice but to accept the dividend and pay the taxes. In addition, stock repurchases offer companies more flexibility than dividends. Once a dividend is put in place, it might have a big negative if the dividends are decreased or ceased in the future. In contrast, if a company stops repurchasing shares, it is hardly noted. Moreover, companies usually initiate a share repurchase when the stock is estimated to be undervalued. A company`s management team knows its business and relative stock price very well, and it is unlikely that it would purchase its stock at a high price. 2. Given historically dividends result in higher taxes for individual investors than capital gains, why have firms still paid dividends? A company that pays dividends forms a positive image and sends good signals to the shareholders...
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...CASE STUDY: Linear Technology team 6 2005120111 Lim jinchul 2010150013 Lee hyeyeon 2010150028 Choi eunyoung First, Linear have paid stable dividends to shareholders since 1992. They initially set the dividend at a relatively low level. By setting the dividend at a low level, Linear could maintain a sustainable payout ratio. Also, shareholders come to expect dividends once a company starts paying it. If the company pays a dividend less than the expected dividend amount, shareholders will be frustrated. Linear’s management believes that paying dividends appeals to potential investors, who both focus on the growth of the firm and interests in steady income. They also thought that providing dividends gives a positive signal to the investors in the way that Linear have the capability to generate positive cash flows even in a tough times. Second, Linear repurchased the stocks with company’s positive cash flows. There are three reasons why the company prefers to buy back stock. First, the company can offset the dilution effects caused by exercising employee stock options. Second, it is better to return additional cash to shareholders in the form of share repurchases, because interest rate is low for the last few years. So using the cash-at-hand to buy back shares makes a better use of cash balance. Third, despite a large cash balance there were no...
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...Linear Technology - Dividend Policy Dividend Policy at Linear Technology Firms pay dividends for a multitude of reasons, such as the ability to make use of excess cash that stockpiles when a firm lacks enough viable investment opportunities with positive NPVs. Paying dividends can also send strong signals to investors of positive future earnings while rewarding them with immediate cash returns. From the market’s perspective, merely sending statements that a company is financially healthy doesn’t hold much weight. However, when a firm undertakes the costly action of issuing cash dividends, the message the firm sends is much stronger and more believable. It shows a certain level of expected financial stability since the markets expect dividends to be paid out consistently once they have been declared. While dividends have always been a popular way of distributing money to investors there has been a strong decrease in their issuance since 1978. Back then, about two thirds of publicly traded companies in the United States paid dividends. However by 1999 this number dropped to about one fifth of firms. The main reason for the decline was that until the new tax laws in 2003 passed, top bracket taxpayers paid a capital gains rate of 20%, while being taxed at 38.6% on their dividends. Therefore, paying dividends seemed to be an inefficient use of a firm’s cash and made these stocks less attractive to wealthy investors. Instead many firms favored stock repurchases. In addition...
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...There is one required group case write-up as shown in the Tentative Schedule. The write-up should be no longer than four double-spaced pages inclusive of exhibits (such as tables, charts and figures). In addition to these four pages, you may have a cover page and another page (the last page of the write-up) that is an assessment of group member contributions. The sum of the group member contributions must total 100%. Please use an 11 point font with a 1.5” margins (for my corrections and comments). (Do not use a plastic cover for the report; staple the pages at the top left of the page). While you will be given many possible questions to consider and discuss, your case write-up will focus on only a few questions. Please clearly indicate in your write-up the questions that you are answering. The recommended solution should be based on the available data in the case and address the decision and/or policy issues facing the firm. The grade you receive on the case write-ups will be based on your ability to provide a solution that you can defend well, one that is also supported from the facts of the case, and one that has a solid financial foundation. In addition, you will be graded on grammar, spelling, punctuation, format and general appearance of your case write-up. In efforts to be sure that each team member participates, the work of each member must be attached (separate to the stapled report) to the back of the case report. This work can be handwritten. It is strongly...
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...Finance II Corporate Finance Investment Selection Criteria and NPV Corporate Finance: Raise cash in financial market, invest into firm's ops, have the result of investment, reinvest or give dividents. Accounting Notions: Types of Financial Statements: -Balance Sheet: Asset = Liabilities + Stockholders' equity Net Working Capital = Current Assets – Current Liabilities . It is the capital needed to keep the company running. Earnings differs from cash flows. In the latter, you must add back non-cash expenses (Depr. And Amort.) and deduct investment expenses and changes in the net working capital. Retained Earnings = Net Income – Dividends Investment Appraisal Methods: Should we invest in all? How to choose between mutually exclusive projects. Investment Project Selection Criteria 1-NPV: Ra: reflects the risk of the project and can be assessed by looking into projects with similar risk. If NPV greater than 0, it's a go. -Properties: Time value of money, NPV depends on expected free cash flow and on the rate of the project, NPV is additive (NPVAB=NPVA+NPVB) 2-Book rate of return= Book income/Book asets. It is an accounting measure, it depends on how the accountant classifies the CF. The components reflect tax and accounting figures, not CF. It is not project specific, it reflect the whole company. It ignores the time value of money and it is rarely used. 3-Payback period: It is the number of years it takes the company to recover the investment...
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...The term ‘dividend policy’ refers to “the practice that management follows in making dividend payout decisions or, in other words, the size and pattern of cash distributions over time to shareholders” (Lease et al., 2000, p.29). This issue of dividend policy is one that has engaged managers since the birth of the modern commercial corporation. Surprisingly then dividend policy remains one of the most contested issues in finance. Dividend policy is concerned with financial policies regarding paying cash dividend in the present or paying an increased dividend at a later stage. Whether to issue dividends and what amount, is determined mainly on the basis of the company's unappropriated profit (excess cash) and influenced by the company's long-term earning power. When cash surplus exists and is not needed by the firm, then management is expected to Payout some or all of those surplus earnings in the form of cash dividends or to repurchase the company's stock through a share buyback program. Management must also choose the form of the dividend distribution, generally as cash dividends or via a share buyback. Various factors may be taken into consideration: where shareholders must pay tax on dividends, firms may elect to retain earnings or to perform a stock buyback, in both cases increasing the value of shares outstanding. Alternatively, some companies will pay "dividends" from stock rather than in cash. Our group have selected 3 journals related to the dividend policy in...
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