Dividend Policy at Linear Techonologies

1. Describe Linear Technologies payout policy.

Linear declared its first dividend on October 13, 1992. The quarterly dividend was set at $0.05 per share. Linear Technologies has mixed payout policy: dividend payout and stock repurchase.

First, Linear pays stable dividends to shareholders. Paul Coghlan wanted to convince investors to buy shares in Linear. Therefore, the company offered a dividend to show that buying shares of Linear’s was not as risky as buying shares in most technologies companies. However, Linear set the dividend at a relatively low level, because as soon as a company starts paying a dividend, shareholders come to expect it. If the company pays a dividend less than the shareholders’ expected dividend amount, shareholders will be frustrated. In other words, cutting down or stop paying a dividend reflects very poorly on the managers and the company in the eyes of investors. By setting the dividend at a low level, Linear could maintain a sustainable payout ratio. Also, the company can attract new investors with dividend payout.

Second, Linear repurchased the stocks with company’s positive cashflows. There are two major reasons why the company prefers to buy back shares. First, the company can offset the dilution effects caused by exercising employee stock options. Second, since interest rate is low, it is better to return additional cash to shareholders in the form of share repurchases. In other words, low interest rate generates not much interest income in the high-grade securities that Linear kept it, so using the cash-at-hand to buy back shares makes a better use of cash balance.