...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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...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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...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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...Payout Policy Analysis Payout 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. ...
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...------------------------------------------------- ------------------------------------------------- Estalene Carrington: 20050270 ------------------------------------------------- Assignment 1 ------------------------------------------------- lECTURER – STACEY ESTWICK Due date – 27 February 2012 ------------------------------------------------- ------------------------------------------------- Question 1 What is Linear’s current payout policy? Linear Technology went public in 1986 and is the seventh largest company by market capitalization under the SOX Act. It split its stock four times since its Initial Public Offering (IPO). Linear’s first dividend was declared on October 13th, 1992. Coghlan (Linear’s CFO) explained that the company had a positive cash flow since their IPO. He further posits that paying a dividend would signal to investors that buying shares in Linear was not as risky as buying shares in most other technology companies. Furthermore, offering a dividend would give Linear access to a new set of investors with varying...
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...for Dividend Policy at Linear Technology Introduction and Overview The purpose of this memo is to analyze the financial data of Linear Technology and determine whether or not to increase the dividend payout. Linear Technology is a semiconductor company founded in 1981. The company specializes in designing, manufacturing, and marketing these semiconductors for various electrical applications. Paul Coghlan, Chief Financial Officer for Linear Technology, was responsible for a recommendation about whether or not Linear should increase its dividend this quarter for its shareholders. Third quarter financials for the 2003 fiscal were promising, however sales and net income are still showing to be lower than record levels set in 2001. Linear Technology is a technology company that designs and manufactures semiconductors for a variety of electronic devices. Most of their customers are other technology firms that need analog semiconductors for its products. Customers of the Linear’s semiconductors include cell phones, digital cameras, complex medical devices, and navigation systems. Linear supplies the integrated circuits to companies in these industries through custom designs. Competition between firms is based in hiring and retaining top-performing engineers for creating innovative products. The nature of the customers purchasing semiconductors from Linear shows that no customer makes purchases greater than 5% of Linear’s business. This could signal that Linear did not...
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...Financial Management Assignment Linear Technologies Case Solution 1) Describe Linear Technologies pay-out policy. As we can see from Exhibit 1 Linear Technology has been paying dividend steadily since 1992. Thus the pay-out policy is a large part in dividends. Its first dividend is paid in 1992. The dividend policy has grown over the years. This may be so that the company projects itself as a less risky share and thus also gaining investors faith. The investors buy its shares and thus increase its demand. This helps to gives positive signals to the investors signalling that the company is stable and can generate earnings steadily. This hypothesis is gains standing from the dividend hypothesis theory. Also analysing the numbers we see that Linear started its dividends with a low payout ratio of around 14.6%. It is known from general trends that investors out faith in early dividend paying firms but punish them if the company reduces its dividend over time. The management of Linear Technologies knows this fact and have increased the dividend over the years. Linear started with a modest pay-out of $0.00625 dividends/share but then increased its dividends steadily by $0.00125 every four quarters. After 2000 it increased this by $0.01 every year. In quarter 3 of 2003 Linear Technology paid a dividend of $0.05 with a pay-out ratio of 27.6%. Even after the tech bubble burst in 2002 the firm has increased its dividend thus signalling to the investors its strength. At this...
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...Describe Linear Technologies payout policy. Linear Technologies’ payout policy, unlike many other competitors in the Semiconductor Index, has a large portion in dividends. Linear has provided a steady dividend payout since 1992 in a gradually increasing rate in small amounts. Linear’s management believes that offering dividends appeals to potential investors, who not only focuses on the growth matters of the firm but also has interests in steady income, and attracts them to purchase shares of the company. They also thought that providing dividends gives a positive signal to the investors meaning “Linear is capable of being profitable and generating positive cash flows even in a recessionary environment such as 2002”. This idea can be supported by theories such as dividend signaling hypothesis. Numerous studies assert the fact that firms with more favorable inside information optimally pay higher dividends and receive appropriately higher prices for their stock. In addition, Linear’s management is powering through stock repurchase in the recent fiscal years. There are two major reasons explaining this increasing amount of stock repurchase. According to Coghlan, Linear’s employee compensation is mostly based on stock options and profit sharing, and in order to counterbalance the exercise of stock options, Linear is buying back stock. The second major reason is because of lack of profitable investment opportunities. The market interest rate has been very low and also Linear has been...
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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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...– CORPORATE FINANCIAL POLICY & STRATEGY, FALL 2013 INSTRUCTOR: TOM BARKLEY CASE #1 – “Dividend Policy at Linear Technology” Written reports are to be no more than five typed pages (based on a 12-point Times New Roman font, double-spaced, with 1-inch margins all around). The assignments are due at the beginning of class on Thursday, September 26, 2013. This case is designed to provide an introduction to payout policy and Modigliani and Miller’s dividend irrelevance proof. Consideration is given to why profitable technology firms like Cisco Systems, Microsoft and Intel used no debt, retained large cash balances and preferred to return cash to shareholders in the form of repurchases rather than dividends; how the tax and market environment for dividends has changed over time; and what impact the proposed dividend tax reforms and market environment of 2003 will have on future payout policy. Answer the following questions in your report: 1. Describe Linear Technology’s payout policy. You should examine the company’s historical payout ratio, dividend yield, (split-adjusted) dividends per share, and (split-adjusted) repurchases per share. 2. What are Linear’s financing needs? (Consider Linear’s historical capital expenditures and its cash balances.) Should Linear return cash to its shareholders? What are the tax consequences of keeping cash inside the firm? [For questions 3 and 4, assume a 3% rate of interest.] 3. If Linear were to pay out its entire...
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...BAKER ALISON BERKLEY WAGONFELD Dividend Policy at Linear Technology It was April 2003 and Paul Coghlan was pulling together his notes for Linear Technology’s board meeting the following day. As chief financial officer of the Silicon Valley semiconductor company, Coghlan was responsible for making a recommendation about whether or not Linear should increase its dividend this quarter. Coghlan and Linear’s CEO Robert Swanson were pleased with the company’s third-quarter financials for fiscal year 2003, but sales and net income still remained substantially below Linear’s record levels set in 2001. In addition, the technology industry was still emerging from a recessionary environment and it was unclear how strong business would be for the remainder of the year. Linear Technology Corporation Headquartered in Milpitas, California, Linear was founded in 1981 by Robert Swanson. Under his leadership, the company focused on designing, manufacturing, and marketing integrated circuits (semiconductors) that were used in various electronic applications such as cellular telephones, digital cameras, complex medical devices, and navigation systems. Linear’s customers spanned numerous industries and no single customer accounted for more than 5% of its business. In 2002, the communications industry accounted for 33% of Linear’s business, computers 27%, automotive 6%, and the remaining 34% was spread across many different applications. Linear focused on the analog segment within...
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...Case Analysis 3: Linear Technologies Payout Policy, Tax Considerations, Cash Retention and Information Asymmetry Christopher Mafi 22996 Karl Bokvist 23020 Oscar Bjurviken 23082 Edwin Olsson 23106 Executive Summary Linear Technologies has throughout the years experienced high growth in both revenue, net income and in cash. Despite declining sales, margins have remained high and Linear by comparison to other companies has the financial possibility to increase its dividend to higher levels than what it currently is today due to a current cash-to-market cap of 16,23%, zero long-term debt and a low dividend yield of 0,49%. The cash balance has a current effective tax disadvantage of 23,50% while investors would prefer to have the cash distributed through a share repurchase due to the tax being paid later on when the investor’s capital gain is realized. An increased dividend would be a credible signal to investors of a strong belief in future success while a clientele effect from paying a dividend would attract certain investors such as European mutual funds. Agency problems are also reduced through a dividend since less cash is available for unattractive investments while CEO Robert Swanson’s options decrease in value, hence indicating CEO’s belief of long-term company success above shortterm option value. Linear should therefore reduce its cash balance by paying out 1/3 in dividends and 1/3 in share repurchases while keeping 1/3 for future investments. Payout...
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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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...Question 1 ________________ Linear Technologyâs payout policy can be observed from Exhibit 3. From Q1 93 onwards, Linear has been steadily paying out dividends every quarter. Over the years, the dividends paid out to shareholders have also increased. From the dividend payout ratio (Appendix, Table 1), it is evident that especially in 2002 to 2003, dividends being distributed have increased from its previously steady ratio of approximately 0.100. Dividends in both years have increased despite the fall in net income. There were stock splits for Linear in 1993, 1996, 1999 and 2000. This meant that the residual shares owned increased, and that shareholders can then receive more dividends. However since dividend payout ratio remained fairly stable, this reflects greatly on Linearâs strong earnings. Question 2 ________________ Linear Technology has no financing needs, given its large cash balance of US$1.565 billion in 2003 and positive net cash flow from 1992. Net income has also been positive since 1992, with net income in the first 3 quarters of 2003 at US$170.6 million. Current liabilities stand at US$135.6 million[1], and long-term liabilities at $97.5 million. Accounts receivable as at March 2003 was at $83.6 million, current assets at $1.741 billion, leading to total assets of $2.031 billion. Hence, this leads to quick and current ratios of 12.2 and 12.8 respectively (Appendix), and a debt ratio of 7.5. This figure indicates that assets far exceed...
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