Linear Technologies

Linear technologies initiated a $0.05 per share dividend in October 1992. Management’s intention was to show investors that buying shares in Linear was not risky. While setting the initial dividend management was aware that investors reward dividend paying companies, however, firms that reduce or stop paying dividends are punished by investors. Therefore, Linear initiated and maintained a conservative dividend payout policy that it could sustain over the long term.

As of March 2003, Linear had $1.5 billion in cash and cash equivalents. The cash balances were substantially higher than Linear’s needs at the time. Linear had no planned acquisitions or significant capital expenditure plans. Over the past few years, Linear was generating adequate cashflow from operations to sustain its current operations. However, with the war in Iraq, uncertain economic conditions and volatility in technology business, and a planned expansion in Asia, Linear wanted to maintain a cash reserve to withstand adverse market pressures.

A $1.5 billion special dividend would translate into $4.8 per share (with 312.4 million shares outstanding). If Linear issued a $1.5 billion special dividend then the value of the stock would decrease by $4.8 per share from $30.87 to $26.06. Additionally, investors might view this move as a negative signal and an indication from management that it does not have any worthwhile projects available, as a result, the stock price and market value is subject to further decline. There will be no impact on earnings or earnings per share under the assumption that Linear will be able to generate enough cash to fund its future operations without taking on debt. If Linear issues debt to raise cash to support its future operations after paying out its entire cash balance as a special dividend then the earnings and earnings per share will decline by the amount of interest expense. At 3% interest rate, the interest expense on $1.5 billion in debt and the...