Dividend Policy At Linear Technology

Dividend Policy at Linear Technology Group 18

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COMPANY BACKGROUND The company that we are analyzing is linear technology corporation  A semiconductor technology firm founded by Robert Wwanson(CEO) in 1981  CFO is Paul Coghlan  Company has been providing dividend since 1992  Company had set it low in beginning as it didn’t want to lower its dividend as according to company:- “ people love dividend but hate it when companies stop giving it”  The company has been consistently paying dividend since then 

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Company background  Company

has also been buying shares back for employee stock options  Janus capital is the largest single shareholder of lltc  The company makes analog circuits which are manufactured in fabrication facility known as analog fab costing (~$200 million)  Analog fab can be used for 10 plus years without becoming obsolete , research expenses ($102 million)  Linear was 7th largest company by market capitalization in Philadelphia stock exchange semiconductor index(sox)

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COMPANY BACKGROUND Linear’s sales, gross profit and net income peaked in FY 2001  Business slowed down considerably in FY2002 and linear could only earn $198 million as compared to $427 million previous year  lttc has a cash reserve of roughly $1.5 billion out of which short term investments are made which are only yielding a total $52 million which is just 3.4 % .  Some investors are asking Coghlan to give some sort of special dividends 

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Problem Statement  Should

linear technology increase its dividend , keep it constant or decrease it?

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GORDONS MODEL  According

to Gordon’s model � = ���(1−�) �−�� p= market price per share eps= earning per share r= firm’s rate of return k=firm’s cost of capital or capitalisation rate b=fraction of retained earnings dividend= eps(1-b)

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GORDONS MODEL  When

r>k growth firm we should lower / stop paying dividend  When , r=k normal firm can pay or hold the dividend it will not affect our price of share  When , r
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COMPANY’S DATA  Dividend

that company is paying per share = $0.05  Stock repurchase of $66.5 million in q4 2002  Stock repurchase of $125 million in q1 2003  Stock repurchase of $1.5 million in q2 2003

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Recommendation 

Linear technology should not increase dividend because:  Effects of US-Iraq war not known  Biggest institutional investor Janus Capital happy with the current structure  Company is earning good interest income  Need to buy back shares- employee stock options offsetting  Investment in technology  High dividend is a sign of slowdown  Only 6/16 SOX companies paid dividends