Dividend Policy at Linear Technology

Harvard Business School Case 9-204-066

Case Software 2-204-702 (Version 2, Revised 2/12/04)

Copyright © 2004 by the President and Fellows of Harvard College

This case was prepared as the basis for class discussion rather than to
illustrate either effective or ineffective handling of an administrative situation.
Exhibit 2 Selected Linear Financial Data in Millions of Dollars (Except Share Data), 1992–20

June Fiscal Year 1992 1993 1994 1995 1996 1997

Income Statement

Sales 119.4 150.9 200.5 265 377.8 379.3

-Cost of Goods Sold 49.5 57 67.6 83.3 106.8 109.8
-Research and Development Expense 12.3 14.8 18.4 23.9 31.1 35.4
-Other Expenses 19.1 23.3 28 29.4 36 29.6
Income Before Taxes 38.5 55.7 86.5 128.5 203.9 204.5
-GAAP Income Taxes 13.5 19.3 29.7 43.8 69.9 70.2
Net Income 25 36.4 56.8 84.7 134 134.4
Common Shares Outstanding 280.2 285.4 290.5 294.3 298.6 303.8
Earnings Per Share $0.09 $0.13 $0.20 $0.29 $0.45 $0.44

Dividends Paid – Preferred 0.0 0.0 0.0 0.0 0.0 0.0

Dividends Paid - Common 0.0 5.3 8.3 9.8 11.9 15.0

Share Price, Fiscal Year Close $2.36 $3.61 $5.50 $8.25 $7.50 $12.94

Cash Flow Statement

Net Income 25 36.4 56.8 84.7 134 134.4

+Depreciation and Amortization 4.5 5.8 6.3 8.6 10.3 12.4
-Capital Expenditure 9.8 7.6 16.2 22.1 70.4 21.9
-Working Capital Investments 7.2 2.6 6.8 -4.5 -9.1 21.2
+Tax Adjustmentb 6.4 2.8 6.1 6.2 11.3 25.3
Operating Cash Flow 19 34.8 46.3 81.8 94.3 129.1

+Stock Issuance 11.7 9.1 13.7 7.6 12.7 18.5

-Stock Purchases 0.7 1.2 1.3 6.1 22.9 11.6
-Dividends Paid 0 5.3 8.3 9.8 11.9 15
-Other Items c
0 4.7 1.5 0 0 0
Net Cash Flow 30 32.6 48.9 73.4 72.3 121

Cash and Short-Term Investments 95.3 127.9 176.8 250.2 322.5 443.4

a
First thee quarters of FY2003.
b
The difference between the exercise price and the market value of LLTC stock could be expensed for tax purposes, leading to large tax adjustments on the cas
Other Items includes long-term investments and acquisitions (other than capital expenditure), extraordinary items, and other adjustments to net income.
c

Source: Adapted from Compustat

xcept Share Data), 1992–2003

1998 1999 2000 2001 2002 2003a

484.8 506.7 705.9 972.6 512.3 440.8

137.8 139.8 179 231.1 144.7 114.6
46.2 54.7 78.3 102.5 79.8 67
29.6 26.5 31.4 28.4 9.4 18.9
271.3 285.7 417.3 610.7 278.4 240.3
90.4 91.4 129.4 183.2 80.7 69.7
180.9 194.3 287.9 427.5 197.6 170.6
307.3 307.5 315.2 318.9 316.2 312.4
$0.59 $0.63 $0.91 $1.34 $0.63 $0.55

0.0 0.0 0.0 0.0 0.0 0.0

18.3 22.1 28.0 41.2 54.0 47.0

$15.08 $33.63 $63.94 $44.22 $31.43 $30.87

180.9 194.3 287.9 427.5 197.6 170.6

20.1 22 25 35.8 46.3 33.5
24.4 39.1 80.3 127.9 17.9 9.8
-7.4 -9.6 -26.6 19.2 42 14.9
58.6 54.6 102.9 115.5 55.2 0.7
242.6 241.3 362 431.7 239.3 180.1

26.6 38.3 54.8 52.7 39.3 27.4

56.5 108.7 0 69.8 221.6 165.7
18.3 22.1 28 41.2 54 47
0 0 0 0 0 -18.4
194.5 148.8 388.9 373.4 3 13.2

637.9 786.7 1,175.60 1,549.00 1,552.00 1,565.20

large tax adjustments on the cash flow statement.

r adjustments to net income.
Exhibit 3 Linear Payout Policy, 1992-2003

Market Reaction

Stock Re- Dividends

Fiscal Purchase Per Sharea Stock Splits Share Pricea
Quarter ($M) ($) (Date) ($) Sharesa (M) Dividendb Earningsb

Q1 93 0.00000 2.70 281.3 13-Oct 14-Oct

Q2 93 0.00625 2:1 (11/3) 3.19 283.1 12-Jan
Q3 93 1.2 0.00625 3.16 283.4 13-Apr
Q4 93 0.00625 3.61 285.4 20-Jul
Q1 94 0.00625 4.28 294.1 12-Oct 12-Oct
Q2 94 0.00750 4.84 287.7 19-Jan
Q3 94 0.5 0.00750 5.28 289.6 19-Apr
Q4 94 0.8 0.00750 5.50 290.5
Q1 95 6.1 0.00750 5.54 290.0 17-Oct 17-Oct
Q2 95 0.00875 6.19 290.5 18-Jan
Q3 95 0.00875 7.00 293.2 18-Apr
Q4 95 0.00875 8.25 294.3 25-Jul 27-Jul
Q1 96 0.01000 2:1(8/11) 10.38 295.2 17-Oct
Q2 96 3.5 0.01000 9.81 296.3 17-Jan
Q3 96 5.0 0.01000 10.44 299.3 16-Apr
Q4 96 14.4 0.01000 7.50 298.6 23-Jul 23-Jul
Q1 97 11.6 0.01250 9.22 297.5 16-Oct
Q2 97 0.01250 10.97 299.5 15-Jan
Q3 97 0.01250 11.06 301.6 16-Apr
Q4 97 0.01250 12.94 303.8 23-Jul 22-Jul
Q1 98 0.01500 17.19 306.0 14-Oct
Q2 98 50.5 0.01500 14.41 303.0 13-Jan
Q3 98 5.9 0.01500 17.25 306.0 14-Apr
Q4 98 0.01500 15.08 307.3 21-Jul 21-Jul
Q1 99 100.0 0.01750 12.50 300.7 13-Oct
Q2 99 8.8 0.01750 22.39 301.3 12-Jan
Q3 99 0.01750 2:1(1/29) 25.63 306.1 13-Apr 13-Apr
Q4 99 0.02000 33.63 307.5 20-Jul
Q1 00 0.02000 29.39 308.5 12-Oct
Q2 00 0.02000 35.78 311.1 18-Jan
Q3 00 0.02000 2:1(3/6) 55.00 313.1 18-Apr 18-Apr
Q4 00 0.03000 63.94 315.2 25-Jul
Q1 01 0.03000 64.75 316.6 17-Oct
Q2 01 52.3 0.03000 46.25 316.0 16-Jan
Q3 01 11.0 0.03000 41.06 317.8 17-Apr 17-Apr
Q4 01 6.5 0.04000 44.22 318.9 24-Jul
Q1 02 114.8 0.04000 32.80 316.3 16-Oct
Q2 02 3.0 0.04000 39.04 317.2 15-Jan
Q3 02 37.3 0.04000 44.22 317.1 16-Apr 17-Apr
Q4 02 66.5 0.05000 31.43 316.2 23-Jul
Q1 03 125.0 0.05000 20.72 311.8 15-Oct
Q2 03 1.5 0.05000 25.72 313.4 14-Jan
 Q3 03 39.2 0.05000 30.87 312.4

a
Adjusted for splits.
b
Announcement date. The quarterly earnings announcement date for Q4 1994 is not available from Compustat.
Return on the day before, the day of, and the day after the earnings announcement. The SOX index begins in October 1994.
c

Source: Adapted from Compustat, the Center for Research on Security Prices, Datastream
Market Reaction

LLTC SOX
Returnc(%) Returnc(%)

-1.6
-1
11
-1.2
11.7
0.6
-4.1

2.2
4.7 0.5
1.8 -5
11.7 0.2
14.3 7.3
10.6 3.6
-14.3 4.6
-1.4 -5.8
-11 -1.3
11.4 2.3
-2.3 -0.7
8.3 3.9
5.4 -4
6.6 6.4
13.3 6.8
-15.5 -5
11.9 9
7.9 3.1
0.3 -6.2
-10.7 -6.4
-3.5 -1.4
6.1 -0.5
15.2 13.5
-2 -4.5
-18.3 -14.6
8.8 1
8.5 7.2
-11.3 -3.6
-10.1 -9.5
-1.1 -6.5
4.9 3.7
0.5 -2.9
4.3 -0.3
-2.4 -4.2
Exhibit 4 Top 10 Institutional Shareholders, 2003

Institution Shares

Janus Capital Management 34,151,384

Capital Research and Management Company 23,807,150
State Farm Mutual Automobile Insurance 14,599,700
Fidelity Management & Research (FMR) 10,902,153
Barclays Bank 10,561,160
Oak Associates 9,754,731
State Street 9,468,226
Northern Trust 7,473,564
AXA Financial 7,429,952
Massachusetts Financial Services 7,309,046

Source: Adapted from Thomson Financial Spectrum Database

utional Shareholders, 2003

Percent of Shares
Outstanding

10.91
7.61
4.66
3.48
3.37
3.12
3.03
2.39
2.37
2.34
Exhibit 5 Dividend Policy for the S&P 500, Annual Data from 1993-2002

Return on Book
Sector Dividend Yield Earnings Yield Equity

Utilities 4.80% 7.10% 11.40%

Telecommunications Services 2.30% 5.20% 14.40%
Materials 2.20% 5.40% 12.20%
Energy 1.80% 5.20% 9.80%
Financials 2.30% 7.00% 16.50%
Industrials 1.80% 5.60% 15.20%
Consumer Staples 1.80% 4.60% 21.10%
Consumer Discretionary 1.40% 5.40% 15.50%
Health Care 0.90% 3.90% 16.90%
Information Technology 0.30% 3.60% 14.90%

Weighted Average 1.80% 5.40% 15.10%

a
The sample includes S&P 500 firms in 2002. Not all firms have data back to 1993.
Source: Adapted from Goldman Sachs Portfolio Strategy (July 1, 2003 Research Report)
Exhibit 6 Cumulative Executive Compensation, 1993-2002

Value
Stock Stock Realized
Options Options from Options
Name (CEO Grantsa Exercisea,b Exercise Ownedc
Company Year) Salary ($M) Bonus ($M) (000) (000) ($M) (000)

Linear Robert
Technology Swanson 2.6 12.6 3,000 1,297 29.1 1,003
John
Chambers
Cisco Systems (1995) 2.3 3.3 45,840 43,090 344.9 35,400
Craig Barrett
Intel (1998) 4.3 17.8 5,005 10,752 196.6 5,005
Maxim John Gifford 2.7 12 10,913 10,522 206.3 4,946
Steven A.
Microsoft Ballmer (2000) 3.5 2 0 0 0 0

a
Adjusted for splits.
b
Includes the exercise of options granted prior to 1993.
As reported in the proxy statement in 2002. In 2002, Robert Swanson and John Chambers forfeited 700,000 options and 2 million options, respectively.
c

Source: Adapted from Execucomp, Yahoo Finance

 Shares
Ownedc Common
(000) Shares (M)

530 316

2,047 7,303

2,732 6,575
2,047 320

410,968 5,359

d 2 million options, respectively.

Exhibit 8 Municipal and corporate bond yields

Bloomberg 1-year
AAA Corporate Bloomberg 1-year
Year Debt AAA Muni Debt

Annual Average Month-End Yield (%):

1995 6.25 4.17

1996 5.89 3.81
1997 5.94 3.92
1998 5.44 3.68
1999 5.73 3.64
2000 6.71 4.49
2001 3.87 2.94
2002 2.37 1.87

Source: Adapted from Bloomberg

Exhibit 11 Data on Companies in the Semiconductor Index (SOX) in Millions of Dollars (Except Sh

Company Ticker Share Pricea Shares (M) Net Income Cash Flowb

Advanced Micro Devices AMD 6.18 344.5 -1303.0 -794.1

Altera ALTR 13.54 383.5 91.3 237.8
Applied Materials AMAT 12.58 1648.0 269.0 75.1
Broadcom BRCM 12.35 277.8 -2236.6 -144.4
Intel INTC 16.28 6575.0 3117.0 4426.0
Kla-Tencor KLAC 35.94 189.8 216.2 215.4
Linear Technology LLTC 30.87 316.2 197.6 239.3
Lsi Logic LSI 4.52 375.1 -292.4 115.1
Maxim Integrated Products MXIM 36.12 320.1 259.2 313.4
Micron Technology MU 8.14 602.9 -907.0 -181.8
Motorola MOT 8.26 2315.3 -2485.0 732.0
National Semiconductor NSM 17.04 183.8 -33.3 49.8
Novellus Systems NVLS 27.27 149.1 22.9 188.1
STMicroelectronicsf STM 18.90 887.5 429.0 718.0
Taiwan Semiconductor g
TSM 6.84 3703.2 413.8 951.3
Teradyne TER 11.64 183.2 -718.5 -80.6
Texas Instruments TXN 16.37 1730.6 -344.0 1190.0
Xilinx XLNX 23.41 339.0 125.7 299.0

a
Share price on March 31, 2003.
b
Compustat operating cash flow (Item 308) less capital expenditures (Item 128).
c
Cash and short-term investments.
d
Special (non-recurring) dividend.
e
Micron discontinued its dividend in 1996.
STMicroelectronics is an American Depository Receipt (ADR), based in France.
f

g
Taiwan Semiconductor is an ADR, based in Taiwan.
Source: Adapted from Compustat, Center for Research on Security Prices
) in Millions of Dollars (Except Share Data), 2002

Dividend
Long-Term Stock Re- Initiation
Cashc Debt Dividends purchases Date

1037.7 1779.8 0.0 0.0 Apr-95d

942.7 0.0 0.0 139.5
4929.5 573.9 0.0 125.0
502.7 1.2 0.0 0.0
12587.0 929.0 533.0 4014.0 Sep-92
673.3 0.0 0.0 123.2
1552.0 0.0 54.0 221.6 Oct-92
990.0 1241.2 0.0 0.0
765.5 0.0 0.0 864.0 2-Oct
985.7 360.8 0.0 0.0 Sep-91e
6566.0 7674.0 364.0 0.0 Nov-46
915.4 19.9 0.0 0.0
1019.7 0.0 0.0 78.2
2564.0 2797.0 36.0 115.0 May-99
1113.0 1701.7 0.0 0.0
325.4 450.6 0.0 0.0
3012.0 833.0 147.0 370.0 26-Apr
675.6 0.0 0.0 60.8
Exhibit 12 Selected Financial Data in Millions of Dollars (Except Share Data), 1998–2002

1998 1999 2000 2001 2002

CISCO (July Fiscal Year)

Sales 8,458.8 12,154.0 18,928.0 22,293.0 18,915.0

Income Before Taxes 2,302.5 3,316.0 4,343.0 -874.0 2,710.0
-GAAP Income Taxes 952.4 1,220.0 1,675.0 140.0 817.0
Net Income 1,350.1 2,096.0 2,668.0 -1,014.0 1,893.0

+Depreciation and Amortization 327.3 486.0 863.0 2,236.0 1,957.0

-Capital Expenditure 414.8 584.0 1,086.0 2,271.0 2,641.0
-Working Capital Investments -688.7 -937.0 -1,262.0 -5,078.0 -2,829.0
+Tax Adjustment 514.4 919.0 1,348.0 92.0 -92.0
Operating Cash Flow 2,465.7 3,854.0 5,055.0 4,121.0 3,946.0

+Stock Issuance 488.5 740.0 1,564.0 1,262.0 655.0

-Stock Purchases 0.0 0.0 0.0 0.0 1,854.0
-Dividends Paid 0.0 0.0 0.0 0.0 0.0
-Other Items a
2,538.3 4,269.5 3,110.0 4,001.0 -3,002.0
Net Cash Flow 415.9 324.5 3,509.0 1,382.0 5,749.0

Cash and Short-Term Investments 1,691.5 2,016.0 5,525.0 6,907.0 12,656.0

Common Shares Outstanding 1,041.7 3,271.0 7,138.0 7,324.0 7,303.0
Share Price, Fiscal Year Close $95.75 $62.13 $65.44 $19.22 $13.19

INTEL (December Fiscal Year)

Sales 26,273.0 29,389.0 33,726.0 26,539.0 26,764.0

Income Before Taxes 9,137.0 11,228.0 15,141.0 2,183.0 4,204.0
-GAAP Income Taxes 3,069.0 3,914.0 4,606.0 892.0 1,087.0
Net Income 6,068.0 7,314.0 10,535.0 1,291.0 3,117.0

+Depreciation and Amortization 2,807.0 3,186.0 4,807.0 6,052.0 5,042.0

-Capital Expenditure 3,557.0 3,403.0 6,674.0 7,309.0 4,703.0
-Working Capital Investments -31.0 180.0 2,912.0 -1,627.0 -358.0
+Tax Adjustment 285.0 1,015.0 397.0 -316.0 612.0
Operating Cash Flow 5,634.0 7,932.0 6,153.0 1,345.0 4,426.0

+Stock Issuance 2,127.0 543.0 797.0 762.0 681.0

-Stock Purchases 6,785.0 4,612.0 4,007.0 4,008.0 4,014.0
-Dividends Paid 168.0 366.0 470.0 538.0 533.0
-Other Items a
3,109.0 -665.0 438.0 -166.0 -477.0
Net Cash Flow -2,301.0 4,162.0 2,035.0 -2,273.0 1,037.0

Cash and Short-Term Investments 7,626.0 11,788.0 13,823.0 11,550.0 12,587.0

Common Shares Outstanding 1,658.0 3,334.0 6,721.0 6,690.0 6,575.0
Share Price, Fiscal Year Close $118.56 $82.31 $30.06 $31.45 $15.57
MAXIM (June Fiscal Year)

Sales 560.2 607.0 864.9 1,576.6 1,025.1

Income Before Taxes 269.9 297.2 425.2 505.0 386.8
-GAAP Income Taxes 91.8 101.0 144.6 170.0 127.7
Net Income 178.1 196.1 280.6 334.9 259.2

+Depreciation and Amortization 15.1 17.6 19.7 90.9 56.3

-Capital Expenditure 109.4 54.3 176.1 336.5 90.4
-Working Capital Investments -18.8 -34.8 -26.2 -235.6 48.4
+Tax Adjustment 83.5 57.7 157.3 148.3 136.8
Operating Cash Flow 186.1 251.9 307.7 473.1 313.4

+Stock Issuance 37.2 51.1 79.3 114.3 109.3

-Stock Purchases 123.1 113.9 257.0 250.7 864.0
-Dividends Paid 0.0 0.0 0.0 6.0 0.0
-Other Itemsa 1.2 -2.7 3.7 -248.7 13.5
Net Cash Flow 99.0 191.8 126.2 579.4 -454.9

Cash and Short-Term Investments 322.9 514.7 640.9 1,220.4 765.5

Common Shares Outstandingb 130.8 135.8 282.8 330.2 320.1
Share Price, Fiscal Year Close $31.69 $66.50 $67.94 $44.21 $38.33

MICROSOFT (June Fiscal Year)

Sales 14,484.0 19,747.0 22,956.0 25,296.0 28,365.0

Income Before Taxes 7,117.0 11,891.0 14,275.0 11,525.0 11,513.0
-GAAP Income Taxes 2,627.0 4,106.0 4,854.0 3,804.0 3,684.0
Net Income 4,490.0 7,785.0 9,421.0 7,721.0 7,829.0

+Depreciation and Amortization 528.0 483.0 668.0 1,536.0 1,014.0

-Capital Expenditure 656.0 583.0 879.0 1,103.0 770.0
-Working Capital Investments -335.0 1,470.0 182.0 -1,661.0 -3,882.0
+Tax Adjustment 1,527.0 3,232.0 4,054.0 2,504.0 1,784.0
Operating Cash Flow 6,224.0 9,447.0 13,082.0 12,319.0 13,739.0

+Stock Issuance 2,512.0 4,457.0 2,245.0 1,620.0 1,497.0

-Stock Purchases 2,468.0 2,950.0 4,896.0 6,074.0 6,069.0
-Dividends Paid 28.0 28.0 13.0 0.0 0.0
-Other Items a
1,279.0 7,617.0 3,856.0 63.0 2,115.0
Net Cash Flow 4,961.0 3,309.0 6,562.0 7,802.0 7,052.0

Cash and Short-Term Investments 13,927.0 17,236.0 23,798.0 31,600.0 38,652.0

Common Shares Outstanding 2,470.0 5,109.0 5,283.0 5,383.0 5,359.0
Share Price, Fiscal Year Close $108.38 $90.19 $80.00 $73.00 $54.70

a
Other Items includes long-term investments and acquisitions, extraordinary items, and other adjustments to net income.
On April 11, 2001, Maxim acquired Dallas Semiconductor Corporation with 41 million shares of stock.
b

Source: Adapted from Compustat

hare Data), 1998–2002
1. Cashflow is used to buy back shares

Net Cash Flow 1,565.20

Price per share 30.87
No. of shares that can be bought back 50.7029
Remaining number of shares 261.6971
EPS after buyback 0.651899
EPS before buyback 0.546095
Change in EPS -0.105804
Total market cap 9643.788
Change in Market Cap -1565.2

2. Cashflow is used to give dividend

Net Cash Flow 1,565.20

EPS before dividend 0.546095
Dividend per share 5.010243
Tax paid 234.78
Total market cap 9643.788
Change in Market Cap -1,330.42
Post dividend price per share 26.61129
Cum dividend price per share 31.62154

3. Cashflow is used to buy back shares and special dividend

Net Cash Flow 1,565.20

Cash available for buyback and didvidend 1043.467
Cash available for buyback 521.7333
Price per share 30.87
No. of shares that can be bought back 16.90098
Remaining number of shares 295.499
EPS after buyback 0.577328
EPS before buyback 0.546095
Change in EPS 0.031234

Cash available for dividend 521.7333

Dividend per share 1.765601
Total market cap 9643.788
Tax paid 78.26
Change in Market Cap -965.2067
Post dividend price per share 29.36924
Cum dividend price per share 31.13484
 Share Price Earnings No. of shares EPS

Retains Cash 31.43 198 316.20 0.63 Retains Cash

Repurchases 31.42 152.6 268.47 0.57 Repurchases
Dividend 152.6 316.2 0.48
Share Price Earnings No. of shares EPS

31.43 197.6 316.15 0.63