Payout policy at Linear Technology

Outline
Analysis of the general background
Ability to return cash: funding requirement analysis
Return cash or retain cash: Cost of retaining cash
How to distribute

General background
Basic description: Exhibit 1
1986: first IPO
1992 starting paying dividends: increasing the div by about 0.01$ per share each year
2002: significant drop in sales: -47% in sales, - 54% in profit 2003: an other increase in dividend to 33.1% of payout ratio. Historical payout policy
Describe Linear’s approach to dividends and repurchases in the past. Exhibit 3
Calculate the dividend yield and Dividends per share. How does dividend change?

How does repurchase change?
Calculate the payout ratio. Has the firm a long-run target payout ratio? (analyzing exhibit 2)
How do you interpret the variation of the payout ratio? (Ex.
TN-1
Lintner (1956): firms have a LR target payout ratio, but follow a conservative process to raise dividends at an adjustment rate.

Ability to return cash: Funding requirement Do you think whether a payout ratio of 33.1% presents any problems for Linear?
Analyzing Exhibit 2, what is the trend of change of net income, operating cash flow, relative to sales?
How about the pre-capital expenditure cash flow as compared to the capital expenditure?
Look at the cash balance in 2003, what do you think the cash position of Linear?

Funding requirements
Exhibit TN-1:
Both Net income in % sales and cash flow in % of sales remains stable, even if the sales dropped by 47% in 2002
The pre-capital expenditure cash flow ranged from 4-19 times capital expenditures.
Large cash balance in 2003: 1.57billion or 16.2% of its market value.
=> Linear is able to pay a dividend of 33% pre-investment cash flow while still meeting its investment needs.

Return cash or retain cash?
Cost of excess cash
Taxes:
td :Distribution tax for dividends or capital gains tp :personal tax tc : Corporate tax
Option 1: hold an extra dollar of Treasury bonds (get r) and distribute it with interest later.
Option 2: distribute an extra dollar right away.

look at Exhibit 7, what do you infer about the dividend return and capital gain in the presence of corporate and personal taxes?

Return cash or retain cash?
Agency: investment opportunity of Linear
Read the 4th paragraph in page 3. What do you infer in respect to the business plan of Linear?
Has the manager incentive to work for the maximum value of the firm? (compensation plan for the CEO, ref ex.6) What do you infer the cost of carrying cash inside the company? How to distribute cash to shareholders? Consider the various theories that make the dividend policy relevant. What do you think the pricing behavior for a $ 1 dividend?
On the announcement day
On the ex-div day?
Table

How should Linear return cash to its shareholders?
EPS effects:
Back to the MM world, what are the different effects on stock price and the EPS under the following payout policy? (data from Ex-2 in 2002)
Retain all cash
Repurchase stock
Pay dividend

Table

How should Linear return cash to its shareholders?
Taxes:
What is the price behavior on the announcement day
and