Linear Technologies Essay examples

965 Words Jun 12th, 2012 4 Pages
Describe the payout policy of Linear Technologies historically. Describe Linear’s current cash position and its financing needs.

The company initiated its dividend in 1993 with a relatively conservative payout ratio of 15%, based on a quarterly dividend of $0.05/share/quarter ($0.00625 split adjusted as per Exhibit 3). As of 3Q2003, the dividend is also $0.05/share/quarter, adjusted for stock splits, which translates into a payout ratio of . The payout ratio is currently 27.5% on an as adjusted basis. The payout ratio reached 10% in 2001, when EPS was at a record high. On an adjusted basis, Linear Technologies has consistently increased its dividend each year. Since 2000, the dividend increases have been $0.01/share/quarter each year.
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If Linear decides to payout the $1.5bn of cash as a share repurchase the shareholders, but not the company, will be taxed upon the repurchase as a capital gain. The current capital gains tax is 15% for those individuals who have held shares for longer than one year. This would represent a total tax check of $225mm for shareholders.

How is Linear’s decision to pay out dividends related to the information asymmetry problem?

There are three information asymmetry concepts related to the decision to increase Linear Technologies’ dividend.

By deploying capital through an increased dividend versus a share repurchase, management is signaling that Linear’s stock is fairly valued in the market. An increase in the dividend rate will signal to the market that management believes long-term cash flows are stable and healthy enough that management is willing to return cash flows to shareholders into perpetuity. If Linear Technologies increases its dividend too much, or returns too much cash to shareholders, management could signal to the market that they believe the company’s growth is slowing and there are relatively few NPV positive projects for the company to invest in.

Should Linear return cash to shareholders? If so, how?
The company should increase its periodic dividend by $0.01/share/quarter as investors have come to expect annual dividend increase in this range. However, a dividend increase much higher than this will send a message to investors

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