Dividend Policy at Linear Technology

Linear Technology Payout Policy, Financing Needs and Tax Consequences:

Linear Technology announced its first dividend on October 13, 1992. CFO Paul Coghlan explained that Linear was well positioned in the strong analog industry. He expanded to say that Linear wanted to show investors that buying shares in Linear was not as risky as buying shares in most technology companies and that offering a dividend would give Linear access to new investors with income goals in addition to growth goals. In 1994, Linear initially set the quarterly dividend at a relatively low level of $0.05 per share. They realized that investors respected companies for paying a dividend, but strategically wanted to remain realistic on how much they could afford to payout for sustainability in the technology market.

In 2002 Linear’s management and board debated on whether to increase the dividend. Coghlan argued for an increase in the dividend price to validate Linear’s ability to be profitable and cash flow positive even in times of struggle and believed money could be returned to shareholders in the form of share repurchases. One of the primary reasons that Linear buys back stock is to offset the exercise of employee stock options. Coghlan’s analysis took into account the current market conditions of the technologies sector. Interest rates were low, which encouraged Linear to use cash balances to buy back more shares.

Looking at this competitively, of the 16 technology companies on the SOX index, only 6 of these paid out dividends to its shareholders. Coghlan considered Intel and Maxim as the benchmarks for this market. In 2002 Intel paid out $0.10 per share and Maxim paid out $0.02 per share. Linear at $.05 per share was in the ball park of its competition. An increase in the dividend meant that the dividend payout ratio that was 15% was to move up to around 25-30%. This would let investors know that Linear was positive about their abilities as a company and this would be a...