Dividend policy at Linear Technology

FA Assignment Sec-C
Submitted by: Satyajeet Sahoo 2010PGP342

Initially the dividend amount was just token as it believed that investors don’t want companies to reduce their dividends so having a token dividend meant that they could sustain it for longer periods. 2. Gives positive signal to the market Cash dividends shares sell at a premium Capital gain is not always certain Reduces the cash flow available to the managers thereby reducing the conflict between the shareholders and the company 5. Finance new fabrication facilities The decision needs to take into account – benefits to the company and to the shareholders.Executive Summary Linear technology is a leading player of analog devices. 2. Option 1 – Paying Dividends Benefits 1. but that is not recommended at this time as the growth is slowing down. By paying dividends the company will form a positive image with the shareholders. This tax can be deferred by going for the repurchase decision. 3. On the other hand repurchase causes the EPS to rise. which can result in capital gains to the shareholders. With respect to paying dividend the company strategy was to be very conservative by setting it at a low level initially so that it will be able to match the expectations of the shareholders.5 billion which could be utilized by them to finance new fabrication facilities that require an investment of $200 million which would enable them to continue innovating and expanding into new markets. Another alternative is to reinvest the cash to build fabrication facilities. Re-adjusting the dividend (increasing). Now. Paying dividend reduces the firm value by reducing the assets. It will also attract the investors that prefer companies that pay dividend. Attracts investors that prefer companies that pay dividend . But will also result in tax on dividend amount to shareholders. 4. This increase in the EPS leads to share price appreciation. This can be explored later once the recessionary trend changes to growth. 3. Shareholders are delighted 7. It is currently having excess cash of $1. Dividends do not signify a reduction on earnings 6. the CFO Paul Coghlan is pondering over the following options: 1. Repurchase of their shares with the cash. It was one of the first technology companies to start paying out dividends.

055 0.343 2.496 14.4 0.05 0.04 0. .62 17.4 312. As the capital gains are more substantial. Dividends are taxed.058 15.744 1. the price of the shares can jack up in the window between the announcement and the repurchase.06 12. which shareholders would not like 2.182 18.8116 Option 2 – Repurchase shares from market Benefits      Increased EPS – increased shareholder value Higher stock prices – capital gains Deferred income taxes (on realized capital gains) Reduces future dividend liability Displays confidence of the firm in itself Shortcomings  There is executional delay between announcing a buyback and executing it.8744 2. Tax Consequences of Dividends (All figures are in $Million) Outstanding New Total Total Tax Paid Shares Dividend Dividend Paid 312.1087 2. Some shareholders might be more interested in capital gains than dividend gains.5773 2.4 312.045 0.Shortcomings 1. This can lead to repurchased shares being costlier than the original shares and thus lesser number of shares will be repurchased.4 312. On hearing the announcement of repurchase.4 312.

47 3582. . since Linear has excess cash.6 For 7 % growth rate 231. so this can be easily financed from the current cash reserves.534 50.89 0.61 Net Income (for 2003) 1330.7 197.9 233. Also.89 56. it can set aside some money for investment into new fabrication facilities.Comparing the two options The two options can be compared by comparing the change in the stock prices effected Cash paid as dividend Dividend Tax paid Divide nd per share Dividend received New Share Price Change in value 1565.2 50. Dividend payment would have a negative effect in terms of the value of the form and the stock price. Since the fabrication facilities of analog devices cost only $200 m.95 0.2 Cash used for repurcha se 234.1 50.42 EPS (for 2003 at 3%) P/E (for 2003 as referen ce) New Price of Share Change in Value of the firm Repurchase 1565.54 3466. of outstan ding shares 4. The benefits of the new fabrication facilities wont be felt immediately but will have an impact in the future.78 No.34 Conclusion Thus from the above analysis we can see that it is more beneficial for Linear Technology to use its excess cash for share repurchase as it adds more value to the firm and leads to increase in the price of the stock which is additional motivation for the employees.7 261.01 No.2585 Net Income (for 2002) 26. In addition from the tax rate perspective also it is beneficial for the investors and the firm that Linear Technology maintains its current dividend ratio. of shares repurc hased 5.

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