Linear Technologies Analysisi

1. Describe Linear Technology’s payout policy?

Linear Technology’s payout policy has developed and evolved since company inception. Linear Technology was founded in 1981. The main company focus was to design, manufacture and market integrated circuits that were used in a variety of electronic applications. In 1986 Linear went public on the NASDAQ in order to raise capital, create a publicly traded asset, to use shares for future acquisitions and enhance their reputation. Linear stock split four times since its initial public offering, which suggests the price was getting high quickly and Linear wanted to split the stock to reduce trading volume and volatility. Another reason for stock splitting could be psychological as many investors believe stock splits result in an increased share price as the company is implicitly signaling its confidence in the future prospects of the company (See Exhibit 1 Linear Stock Price History, 1986–2002).

In 1992 the analog market was a good business and Linear was well-positioned in the industry. Linear was cash flow positive and wanted to show investors buying shares in Linear was not as risky as buying shares in most other technology companies. Linear announced its first dividend on October 13, 1992. Linear believed offering a dividend would give the company access to a new set of investors that had income goals in addition to growth goals. The quarterly dividend was initially set at $0.05 per share; this amounted to $8.3 or 15% of fiscal year 1994 earnings. The dividend was set low on purpose because investors respect companies for paying a dividend, yet turn and hammer those who reduce or stop paying dividends down the road. Linear had to carefully select a payout ratio they could sustain over time (See Exhibit 2 Linear Payout Policy, 1992–2003).

In 2001, Linear’s sales, gross profit and net income peaked when technology spending worldwide was at an all-time high. Linear finished the year with $427 million in net income....