Linear Question Solutions Essay

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Question 1: Describe Linear Technologies payout policy. What have they done historically? How does this compare to the dividend policy of other firms in the industry?

Payout Policy:
2 Methods: Dividend Payout and Stock Repurchase
First announced in 1992, due to positive expectations, had a top position in the industry and positive cash flows since the IPO
Signal a strong position ina risky market and the transition to a more mature state of the company
The payout ratio has been growing steadily, getting close to 25% in 2003

Why they payout?
Low interest rates offered by Linear’s High-grade securities
Investors can earn more with the dividends on their own
The company has no acquisition plans
Repurchases offset the exercise of employee stock options

Question 2: What are Linear’s financing needs? How large is the dividend relative to its cash level and to the annual cash flow and investment spending of the firm?

Income statement and revenue growth stable during 1992-2002
Boom during peak in 200-2001 (dot-com bubble)
Even in economic downfall, managed to obtain a positive net income and net cash flow
Also maintained margin with focus on variable cost
Analog semiconductors have stable and modest R&D costs, don’t need much financing
Little desire for excessive investments, cash is handled conservatively with investments in short-term debt securities

Therefore:
Internal  Linear has relatively low financing needs
External  can endure financing needs from market risks (War on Iraq) because of high cash reserves

Question 3: Should Linear return cash to its shareholders? What are the tax consequences of keeping cash inside the firm?

Some shareholders have desire for Linear to return its cash
Not necessarily shared by all shareholders

Linear should return cash to shareholders:
Company/Industry in mature stage, without significant growth opportunities, stable positive cash flows
Can reduce Agency Conflicts
Reduces the costs of underinvestment if decided not to invest cash it holds
Many mutual funds/Euro investment firms can only by dividend stocks
Market Valuation  positive signal to the market about future prospects
Regardless of increase:
Current dividend payments could potentially be higher
Current problem with dividend payments is inflexibility

Linear should not return cash to shareholders:
Liquidity Levels
Sensitivty to the market
Should keep at least $200 MM to cover unexpected expenses
Enable business opportunities in the Asian market

Question 4: How can Linear return cash to shareholders? Should Linear return cash to its shareholders? What are the tax consequences of keeping cash inside the firm?

Stock Repurchase:
Shareholders pay more tax on dividend than on repurchases
Repurchases reduce the number of outstanding shares and thus increase EPS and share prices
Flexibility: reducing/eliminating share price has a negative effect on share price
Option Compensation for Execs:
Repurchases would induce more value than would dividend increase, which should be considered in an industry where there is talent competition
Takes the control from the shareholder
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