Linear Technology Case Study

4560 Words Mar 24th, 2014 19 Pages
What is Linear Technology Current Payout Policy?
Linear Technology (LT) is like many firms where it used a combination of dividend payments and share / stock repurchases to distribute cash to its shareholders. With a cash dividend, cash is paid directly to shareholders while, with a stock repurchase, a firm uses its cash to buy back its own shares from the market which in turn reduces the number of outstanding shares (Titman and Keown et al., 2011). LT wanted to be able to attract different dividend clienteles of investors which have the both income goals and growth goals (Baker and Wagonfeld, 2004).
As stated in the article provided, LT is a developer and manufacturer of analog semiconductors and in 1992 it initiated dividends (Baker
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This is true since companies would be more likely to cut dividends when the market is doing poorly and pay dividends when the market is doing well, and by failing to maintain dividends payout the firm would send a bad signal to investors (Titman and Keown et al., 2011). It must also be noted that by not maintaining a stable dividend a stock price can decline by a greater amount than the price gains from the increase in dividends (Jiang and Koller, 2014). In the case of LT, the firm increased its dividend approximately US$0.0025 per share each quarter after their first dividend payout from Fiscal 1992 to Fiscal 1999 (Baker and Wagonfeld, 2004). The dividend payout ratio continued to grow steadily and by the last quarter of Fiscal 2000 dividends per share were increasing by an additional US$0.01 per share, per quarter (Baker and Wagonfeld, 2004). The company’s dividend payout in the third quarter of Fiscal 2003 was US$0.05, which increased in quarter 4 of Fiscal 2002 (Baker and Wagonfeld, 2004). In fiscal 2002, however, LT experienced its first significant drop in sales since the 1986 IPO where sales fell 47% and profits fell by 54% but it still continued increasing the dividend in order to maintain its reputation of profitability and positive cash flows to its investors (Baker and Wagonfeld, 2014). At the end of the third quarter of Fiscal 2003 its payout ratio reached approximately 28%, meaning that the firm…