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, the trend away from dividends could be attributed to changes in publicly traded stocks. In general, firms that pay dividends are mature companies with slow growth and stable revenue. However in the 80’s and 90’s, the market saw firms going public earlier in their lifecycle when growth opportunities were stronger than current profits. Leading this trend away from dividends was the emergence of