Dividend Policy at Linear Technology
FIN610 - 01/31/2012
Lindsay Ramirez / Mavis Yu / Marci McCall / Mohammad Alkhamis / Sarah Spring 1. What do you advise Paul Coghlan to recommend to Linear Technology’s Board of Directors?
We recommend that Coghlan increase the total payout offered to shareholders, keeping the dividend price the same as Q1 of 2003 and simultaneously repurchasing the company stock.
By repurchasing stock rather than offering shareholders a higher dividend, investors will benefit from the comparatively lower capital gains tax (which can be deferred indefinitely) rather than being forced to pay a higher income tax on dividends received. By reducing the total number of shares available, the value…show more content… When it comes to paying dividends, consistency is important.
Factor 2: Coghlan should also consider what other investment opportunities are available to the company, and how such projects might be financed. Given that the timing of good investment opportunities can be difficult to predict, the company may wish to retain some cash on hand (or maintain easily-convertible assets).
Factor 3. Coghlan also needs to investigate how other benchmark companies deal with their payout policy. While we do not suggest that Linear mirror the payout policies of its competitors, it is important to understand the other opportunities in the same field that are available to investors in order to maintain the company’s payout policies within a reasonable continuum.
Factor 4. Coghlan should also predict the consequences of his decision on the stock price, given that many investors consider share price to be very important in making investment decisions.
5. Finally Coghlan should consider the expectations of the company’s stockholders. Although this is a secondary concern, it is important to understand the expectations of shareholders based on larger industry and national trends. 3. If Paul Coghlan were to recommend an increase in the cash payout to shareholders, what are the advantages to paying it out as a dividend? What are the advantages of paying the increase out via a share repurchase? Be specific about tax and other effects.