9-204-066
REV: FEBRUARY 11, 2004

MALCOLM P. BAKER
ALISON BERKLEY WAGONFELD

Dividend Policy at Linear Technology
It was April 2003 and Paul Coghlan was pulling together his notes for Linear Technology’s board meeting the following day. As chief financial officer of the Silicon Valley semiconductor company,
Coghlan was responsible for making a recommendation about whether or not Linear should increase its dividend this quarter. Coghlan and Linear’s CEO Robert Swanson were pleased with the company’s third-quarter financials for fiscal year 2003, but sales and net income still remained substantially below Linear’s record levels set in 2001. In addition, the technology industry was still emerging from a recessionary environment …show more content…
Financial History
Linear went public on the NASDAQ in 1986. The company split its stock four times since its IPO.
(See Exhibit 1 for Linear’s stock price relative to the S&P 500. Volatility between 1998 and 2002 was
56%.) Coghlan was hired as the CFO shortly after the company went public.
Shareholders had rewarded Linear for solid growth and steady margins over the years. Linear’s sales, gross profit and net income peaked in FY 2001 when technology spending worldwide was at an all-time high.2 Business slowed down considerably in FY 2002, and Linear finished the year with net income of $198 million relative to $427 million from the previous year. (See Exhibit 2 for selected income statement and cash flow data for Linear from 1992–2003.) In spite of the major drop in sales,
Linear held its margins through cost cutting and work shutdowns. Unlike most companies in the semiconductor industry, Linear had established a variable cost structure early in its existence.
A large fraction of employee compensation was profit sharing; in 2001, some employees received a
70% increase in their total compensation, while in 2002, profit sharing was set at a much lower level.
Employee stock options were also a major component of compensation for Linear employees. These forms of variable compensation helped Linear maintain a positive cash flow in down years.