Linear Technology Case Study

UST dividend payment ability can be hampered given the following risk factors: anti-trust dispute is resolved in favor of competitors and UST is subject to further penalty, corporate restructuring or new entrants are encouraged to enter the moist smokeless market; management’s continued lackluster non-core investment performance further harms the company’s return over investment; Price value further prey market share of premium products while premium R&D is not catching up with the pace.

As we can see from Exhibit 1 Linear Technology has been paying dividend steadily since 1992. Thus the pay-out policy is a large part in dividends. Its first dividend is paid in 1992.

The dividend payout ratio provides an idea of how well earnings support the dividend payments. More mature companies tend to have a higher payout ratio. This is well evident with Pepsi Co’s dividend payout ratio of 45.95% as compared to Coca-Cola’s 20.11%. A low dividend payout is always better as it leaves more room for the company to increase dividend payouts in the future while a high ratio means there is less room.

The company initiated its dividend in 1993 with a relatively conservative payout ratio of 15%, based on a quarterly dividend of $0.05/share/quarter ($0.00625 split adjusted as per Exhibit 3). As of 3Q2003, the dividend is also $0.05/share/quarter, adjusted for stock splits, which translates into a payout ratio of . The payout ratio is currently 27.5% on an as adjusted basis. The payout ratio reached 10% in 2001, when EPS was at a record high. On an adjusted basis, Linear Technologies has consistently increased its dividend each year. Since 2000, the dividend increases have been $0.01/share/quarter each year.

What’ s more, although investors like the dividend, it is just period solution to attack people and it may not be able to keep the company growing in a long run.

Since the emergence of the so-called irrelevance theorem by Miller and Modigliani (1961), many corporations are puzzled about why some firms pay dividends while others do not. They were the first to study the effect of dividend policy on the market value of firms by assuming that there are no market imperfections. Miller and Modigliani (1961) proposed that divided policy chosen by a firm has no significant relationship in as far as the market valuation of the firm is concerned. They went further to explain that; the shareholders wealth remains unchanged irrespective of how the firm distributes it income because the firms’ value is rather determined by their investment policies and the earning power of its assets. They further stated that the opportunity to earn abnormal returns in the market does not exist, that is, owners are entitled to the normal market returns adjusted for risk.

The purpose of this case is to have students examine dividend policy--cash dividends, stock splits, and stock dividends--from the viewpoint of its effect on corporate share prices.

By cutting dividends, FPL can react better to future threats. After an initial panic selling triggered by the news shock (FPL never cut its dividend in the past 47 years), investors will process the new information realized that the dividend cut is balanced by an increased growth rate in the future. To justify the HOLD recommendation on the

In addition, given that dividends per share climbed slightly, earnings per share dropped greatly from 1.29 to 0.91, meaning current payout policies limit the value of shareholders.

Dividend Policy of FPL Group’s case is about if investors should buy, sell, or hold the decreasing shares of FPL stock. Florida Power & Light (FPL) is one of the largest electrical companies in the United States. An analyst from Merrill Lynch downgraded the FPL stock after months of decreasing share price. On May 5th 1994, Florida Power & Lights’ stock price fell by 6 per cent after that analysis. From September of 1993 to May of 1994 the price has decreased by 19.6 per cent. Income investors and growth investors are the two ways that people like to invest. Companies like FPL pay a portion of earnings back to their shareholders in the form of dividends. Income investors are highly

We can say that the dividend changes have been so much less volatile than earnings changes because: 1) management believed that shareholders prefer a steady progression in dividends 2) managers are reluctant to make dividend changes that might have to be reversed. They are particularly worried about a dividend increase, which would affect the stock price. Broadhead needed money to invest in FPL; therefore, he needed to make the stock price increase in order to

TABLE OF CONTENTSINTRODUCTION3PERFORMANCE OF AVON'S STOCK FROM 1978-19883EVALUATION OF AVON' S FINANCIAL CONDITION IN MID-19885PURPOSE OF THE EXCHANGE OFFER6EVALUATION OF THE TRADE-OFF7REFERENCES10INTRODUCTIONA firm's decisions about dividends are often mixed up with other financing and investment decisions. Some firms pay low dividends because management is optimistic about the firm's future and wishes to retain earnings for expansion. Other firms might finance capital expenditures largely by borrowing. All the above are examples of dividend policies which can be defined more precisely as the trade-off between retaining earnings on the one hand and paying out cash and issuing new shares on the other. In order to understand the dividend

Even though some firms in the technology industry have shifted their focus in recent years to add more value for their shareholders by paying dividends, the technology world is known for not producing strong dividend yields. Insight, like many of the companies in this industry, has been refraining from paying dividends to its shareholders. The history of the company shows that

Linear Technology Corporation (“LLTC” or the “Company”), headquartered in Milpitas, California, was founded in 1981 by Robert Swanson. LLTC designs, manufactures, and markets a broad line of analog integrated circuits (“IC”) (semiconductors) worldwide. LLTC’s linear circuits are used in various electronic applications, such as cellular telephones, digital cameras, complex medical devices, and navigation systems. LLTC focuses on the analog segment in the semiconductor industry and has moderate-to-high exposure in the communications industry and computer industry, which, in 2002, accounted for 33% and 27% of LLTC’s total sales, respectively. The automotive industry accounted for 6%, and the remaining 34% was spread across various industries. LLTC’s customer base is well-diversified and no single customer accounts for even 5% of its business. The capital investment in the analog IC industry is modest. The cost of a new analog fabrication facility (“fabs”) is approximately $200 million, substantially lower than the cost of a digital fab built by Intel, which can be as high as $2 billion. Once built, the useful life of analog fabs can be over 10 years, while digital fabs often become obsolete in three to five years. Research and development (“R&D”) is also modest as observed in the fact that LLTC’s R&D peaked at $102 million in 2001 .

The enduring nature and extensive range of the debate about dividend policy has spawned a vast amount of literature that grows by the day. For this reason, a full review of all debates is not feasible1. However, this paper endeavours to give justice to the importance of both the topic of dividend policy as an area of financial economic research, and also to the literature that has been produced addressing that topic, by reviewing the most important and influential studies in this area. It attempts to outline the main theories and explanations of dividend policies and to review the main empirical studies on corporate dividend policy. The remaining of this paper is organized as follows. Section 2 gives a short background of corporate dividend policy. Section 3 analyses the theories of dividend policy starting with the dividend irrelevance hypothesis of Miller and Modigliani, and then the alternative hypotheses including bird-inthe-hand, tax-preference, clientele effects, signalling, and agency costs hypotheses. Section 4 summarises the paper.