Linear Tech

Dividend Policy at Linear Technology

case study

This case presents a decision to be made by management of Linear Technology about their dividend policy.

Company is 7th largest by market capitalization in the SOX. Linear technology went public in 1986 and declared first dividend on October 13, 1992. Dividend amount is $0.05 per share quarterly and there were 4 stock splits for now. Management have to decide whether to increase dividend since they have $1565.2M in cash or use it for share repurchase. The company has to analyse these two options to decide which is better for them and will enhance value of the shareholder.

There are few minuses in paying out cash as dividends. First is current tax policy which is double taxation for dividend paid to shareholders. Even though the company has to pay the corporate tax on EBIT, if it chooses to pay all cash as dividends company will lose tremendous amount of money on taxes(up to $280M(this number comes from 38% highest tax rate multiplied on amount of cash)), which is more than enough to pay for new fabs to continue company growth in recession environment. Besides, using this amount to pay dividend will cause share price decrease up to $5(1565.2M paid in dividends divided by 312.4M #of shares outstanding), which is not so good decision for company in technology industry as they are supposed to use cash for research&development. Even though Linear Technology has consistent dividend policy, using all cash to pay dividends does not sound as the best decision. Although, dividend payment is positive signal to the market, it reduces the conflict between shareholders and the management, and cash dividend shares sell at premium compared to stock dividends shares, I would suggest either to keep modest consistent dividend increase(as it was company policy for many years) or to keep same level of dividend in the 4th quarter to keep investors interested in cash dividends, because at the moment of making decision it is...