FINANCIAL

MANAGEMENT CASE
ANALYSIS
CASE 2 : DIVIDEND POLICY AT LINEAR TECHNOLOGY

BY
ANURAG SINGH NEHRA
GAURAV GUPTA
HIMANSHU GULIA
SHIKHAR SHARMA
PRESENTATION FLOW

PREREQUISITES FACTS & OPTIONS

SOLUTION

RECOMMENDATIONS
BACKGROUND

OUR
COMPANY STUDY OF OPTIONS THAT
BACKGROUND COMPANY’S COMPANY

SOLUTION BY FIRM
PROBLEM DATA HAD
DEFINITION SOLUTION AS THEIR : PROS
CONCEPTS SOUGHT BY THE AND CONS
REQUIRED FOR FIRM SUGGESTION BY
PROBLEM US AND ITS
CASE

SOLVING SUPPORTING
DATA
COMPANY BACKGROUND

 THE COMPANY THAT WE ARE ANALYSING IS LINEAR TECHNOLOGY

CORPORATION
 A SEMICONDUCTOR TECHNOLOGY(IC) FIRM FOUNDED BY ROBERT
SWANSON(CEO) IN 1981
 CFO IS PAUL COGHLAN
 COMPANY HAS BEEN PROVIDING DIVIDEND SINCE 1992
 COMPANY HAD SET IT LOW IN BEGINNING AS IT DIDN’T WANT TO LOWER
ITS DIVIDEND AS ACCORDING TO COMPANY:-
“ PEOPLE LOVE DIVIDEND BUT HATE IT WHEN COMPANIES STOP GIVING IT”
 THE COMPANY HAS BEEN CONSISTENTLY PAYING DIVIDEND SINCE THEN
 COMPANY HAS EVEN PERFORMED IN HARD TIMES
COMPANY BACKGROUND

 COMPANY HAS ALSO BEEN BUYING SHARES BACK FOR EMPLOYEE

STOCK OPTIONS
 JANUS CAPITAL IS THE LARGEST SINGLE SHAREHOLDER OF
LLTC(EXHIBIT4)
 THE COMPANY MAKES ANALOG CIRCUITS WHICH ARE
MANUFACTURED IN FABRICATION FACILITY KNOWN AS ANALOG FAB
COSTING (~$200 MILLION)
 ANALOG FAB CAN BE USED FOR 10 PLUS YEARS WITHOUT BECOMING
OBSOLETE , RESEARCH EXPENSES ($102 MILLION)
 LINEAR WAS 7TH LARGEST COMPANY BY MARKET CAPITALIZATION IN
PHILADELPHIA STOCK EXCHANGE SEMICONDUCTOR INDEX(SOX)
COMPANY BACKGROUND

 LINEAR’S SALES, GROSS PROFIT AND NET INCOME PEAKED

IN FY 2001
 BUSINESS SLOWED DONW CONSIDERABLY IN FY2002 AND
LINEAR COULD ONLY EARN $198 MILLION AS COMPARED
TO $427 MILLION PREVIOUS YEAR (EXHIBIT 2)
 LTTC HAS A CASH RESERVE OF ROUGHLY $1.5 BILLION
OUT OF WHICH SHORT TERM INVESTMENTS ARE MADE
WHICH ARE ONLY YIELDING A TOTAL $52 MILLION WHICH
IS JUST 3.4 % .
 SOME INVESTORS ARE ASKING COGHLAN TO GIVE SOME
SORT OF SPECIAL DIVIDENDS
 PROBLEM DEFINITION

SHOULD LINEAR TECHNOLOGY INCREASE ITS

DIVIDEND , KEEP IT CONSTANT OR DECREASE IT?
CONCEPTS REQUIRED FOR
PROBLEM SOLVING
 DIVIDEND PAYOUT IS NOT MANDATORY
 DIVIDEND PAYOUT GIVES A SIGNAL TO THE MARKET THAT COMPANY
IS PROFIT MAKING
 PEOPLE START TO LOSE THEIR FAITH FROM FIRMS AT THE TIME OF
RECESSION
 GORDON’S MODEL
 BUYBACKS ARE MORE FLEXIBLE THAN DIVIDEND
 PEOPLE HATE IT WHEN A DIVIDEND WHICH WAS PAID IS REDUCED OR
STOPPED
GORDONS MODEL

 ACCORDING TO GORDON’S MODEL

𝐸𝑃𝑆(1−𝑏)
𝑃=
𝑘−𝑏𝑟
P= MARKET PRICE PER SHARE
EPS= EARNING PER SHARE
r= FIRM’S RATE OF RETURN
k=FIRM’S COST OF CAPITAL OR CAPITALISATION RATE
b=FRACTION OF RETAINED EARNINGS
DIVIDEND= EPS(1-b)
GORDONS MODEL

 WHEN , r>k GROWTH FIRM

WE SHOULD LOWER / STOP PAYING DIVIDEND
 WHEN , r=k NORMAL FIRM
CAN PAY OR HOLD THE DIVIDEND IT WILL NOT AFFECT OUR PRICE OF
SHARE
 WHEN , r<k DECLINING FIRM
SHOULD PAY HIGHER DIVIDEND
COMPANY’S DATA

 DIVIDEND THAT COMPANY IS PAYING PER SHARE = $0.05

 STOCK REPURCHASE OF $66.5 MILLION IN Q4 2002
 STOCK REPURCHASE OF $125 MILLION IN Q1 2003
 STOCK REPURCHASE OF $1.5 MILLION IN Q2 2003
EXHIBIT 1
EXHIBIT 2
BACK
EXHIBIT 3
EXHIBIT 4
EXHIBIT 5
EXHIBIT 6
EXHIBIT 7
EXHIBIT 8
EXHIBIT 9
EXHIBIT 10
SOLUTION AS SOUGHT BY FIRM

 LINEAR TECHNOLOGY HAS TAKEN DECESION OF PAYING CONSTANT

DIVIDEND OF $0.05
OPTIONS THAT LLTC HAD

 LLTC BEING A FIRM WHICH HAS BEEN MAKING PROFITS IN THE TIME OF RECESSION TOO ,
HAS A STRONG CAPITAL POSITION TOO AS WE CAN SEE FROM EXHIBIT 2 CASH AND
SHORT TERM INVESTMENTS STAND APRROX $1565.2 MILLION
 AND ALSO AS WE HAVE EARLIER READ THE RETURN ON INVESTMENTS WERE VERY LOW
 PEOPLE LOVE DIVIDENDS, AND BECOMING RISK FREE
 PEOPLE LOSE THEIR FAITH IN COMPANY’S AT THE TIME OF RECESSION
 SO FIRM BASICALLY NEEDED TO :
1. SHAREHOLDERS WEALTH MAXIMISATION
2. MAKE COMPANY’S POSITION STRONG IN PEOPLE’S MIND
3. INCREASE SHARE PRICE
4. DO SOMETHING USEFUL OF STAGNANT CASH
5. BUY BACK SHARES
OPTIONS THAT LLTC HAD
1

 THUS WE COME TO 3 ALTERNATIVE DECESIONS

1. CASH FLOW IS USED TO BUY BACK SHARES
2. CASH RESERVE IS USED TO PAY SPECIAL DIVIDENDS
3. IF A PART IS USED FOR BUY BACK AND PART FOR
SPECIAL DIVIDEND

1= ADAPTED FROM A RESEARCH BY Tarun KSG, Saurabh Thadani, Srikanth Konduri, Tushar Gupta ,Nikhil Gupta
1) CASH FLOW IS USED TO BUYBACK
SHARES
 NET CASH FLOW IS : $13.2 MILLION
 PRICE PER SHARE IS : $30.87
 TOTAL SHARES BOUGHT : 13,200,000/30.87=427,600
 NEW NUMBER OF SHARES = 312,400,000-427,600=311,972,400
 POST BUY BACK EARNING PER SHARE =
170,600,000/311,972,400=$0.5468
 EPS BEFORE BUY BACK =$0.546094 ∆𝐸𝑃𝑆 = 0.0007
 ∆𝑴𝑨𝑹𝑲𝑬𝑻 𝑪𝑨𝑷𝑰𝑻𝑨𝑳𝑰𝑺𝑨𝑻𝑰𝑶𝑵 = −$𝟏𝟑, 𝟐𝟎𝟎, 𝟎𝟎𝟎
 AS THIS REDUCES MARKET CAPITALISATION THIS OPTION
CAN BE NEGLECTED
2) CASH RESERVE IS USED TO GIVE
SPECIAL DIVIDEND
 NET CASH RESERVE IS : $1565.2 MILLION
 PRICE PER SHARE IS : $30.87
 TOTAL SHARES : 312.4 MILLION
 LET US ASSUME WE PAY $2.5 PER SHARE AS SPECIAL DIVIDEND
 POST DIVIDEND PRICE PER SHARE = 30.87-2.5=$28.37
 TOTAL AMOUNT PAID = 2.5X312,400,000=$781 MILLION
 EPS BEFORE BUY BACK =$0.546094 ∆𝑬𝑷𝑺 = 𝟎
 ∆𝑴𝑨𝑹𝑲𝑬𝑻 𝑪𝑨𝑷𝑰𝑻𝑨𝑳𝑰𝑺𝑨𝑻𝑰𝑶𝑵 𝑷𝑶𝑺𝑻 𝑩𝑼𝒀 𝑩𝑨𝑪𝑲 = −$781 MILLIOM
 AS THIS REDUCSES MARKET CAPITALISATION THIS OPTION CAN BE
NEGLECTED
3) IF A PART IS USED FOR BUY BACK
AND PART FOR SPECIAL DIVIDEND
 LET US ASSUME THAT WE USE $500 MILLION EACH TO BUY BACK SHARE AND FOR SPECIAL DIVIDEND
TOO
 PRICE PER SHARE IS : $30.87
 SO FOR $500 MILLION WE CAN BUY 500,000,000X100/30.87X312,400,000=5.18%
 HENCE FOR A PERSON HOLDING 100 SHARES WE WILL BUY BACK 5.18 SHARE AND HE HAS 94.82
SHARES AND BUY BACK YIELDS 5.18X30.87=$159.9066
 NOW THE DIVIDEND EVERY SHARE GETS = 500,000,000/296817680=$1.688
 HE EARNS IN TOTAL 94.82X1.688=$160.06
 PRICE PER SHARE AFTER DIVIDEND =30.87-1.688=$29.182
 SHARE PRICE OF SHARES WITH SHARE HOLDER=29.182X94.82=$2767.04
 TOTAL CAPITAL VALUE OF SHARE HOLDER=159.9066+160.06+2767.04=$3087
 AS SHAREHOLDERS VALUE HAS REMAINED SAME , AND RISK ASSOCIATED WITH LLTC IS REDUCED
THIS WILL BE MOST BENIFICIAL FOR SHAREHOLDERS
 BUT THIS WILL ONLY BE GOOD IF THE TAX REFORMS STAY
DECESION COMPANY TOOK ABIDED THE COMPANY POLICY BUT
COULD HAVE BEEN BETTER FINANCIALLY

THEY SHOULD EITHER HAVE REDUCED THE DIVIDEND (

THEORETICALLY)

ELSE THEY SHOULD HAVE PAID SOME AMOUNT FOR SPECIAL

DIVIDEND AND SOME FOR BUY BACK
HENCE WE UNDERSTAND FIRM TOOK A
GOOD STEP BUT IT COULD HAVE BEEN
BETTER
REFERENCES

 WWW.HERITAGE.ORG
 WWW.WIKIPEDIA.COM
 WWW.TIMESOFINDIA.COM
 TEXTBOOK BY IM PANDEY
 RESEARCH PAPER BY CHRISTOPHER TAYLOR
 PRESENTATION BY TARUN KSG, SAURABH THADANI, SRIKANTH
KONDURI, TUSHAR GUPTA ,NIKHIL GUPTA
 RESEARCH PAPER ON DIVIDENDS AND CORPORATE SHAREHOLDERS
BY MICHAEL J. BARCLAY, CLIFFORD G. HOLDERNESS, DENNIS P.
SHEEHAN.
WE ARE OPEN TO YOUR
QUESTIONS