Linear technology
1. Linear Technologies Payout Policy
Linear Technologies is a technology company that designs and manufactures integrated circuits since 1981 to the computers market. The company took the approach of the Personal Computer development in the 1980's assuring a constant growth in all those years, having participation in computers, automotive and communications. The company starts listing on the NASDAQ stock exchange in 1986 when the company was available to the public investors to trade its common stocks. The company, thanks to the high availability of cash in its balance sheets, the company decided to start paying dividends to its shareholders, keeping in mind that the investors respect a company that pays dividends but punish a company that reduces or eliminates the dividend payment. The company decided in 1993 to pay its first dividend of 0.00625 USD per share. At that moment, the price of the share was 2.7 USD. Assuming a yearly basis, the dividend represented 0.78% of the share price. The company since 1993 until 2003 paid every quarter dividends with an average ratio of 0.46% between the dividend and the share price. The company is very careful with the dividend amount because of the market evolution, interest rates and the cash flow of the company. The most difficult situation for the company and its dividend policy was after the second quarter of 2001 when the share fell from its peak price of 64.75 USD to a value of 20.72 USD in the first quarter of 2003 having a ratio between dividend and share price of 0.97%.
2. Linear Technologies financial needs
The decision to give dividends or keep the cash inside the balance of the company has a motivation in the strategy of the company to award its shareholders and the tax policy of the country, the United States of America. The tax policy in the USA evolved from 1961 when the top rate of dividends was 90%; the top corporate rate was over 50%, and top capital gains were 25%. At that moment, is was not good business to have dividend gains because almost 90% of it was paid to the government in taxes. The Reagan Administration reduced both dividend and corporate top tax rates creating an incentive for companies to pay dividends to its shareholders reducing the available cash in the balance affected by corporate taxes and an incentive to
Image 1: Tax rates evolution from 1961 to 2003 (House of Representatives)
Shareholders and investors to hold a stock of a company. The decision of the company to the company to give dividends to shareholders in 1993 after the top dividends tax rate increase in the Clinton Administration came in a good moment when the company needed to give an incentive to the investors and shareholders to buy and retain its stocks.
Image 2: Price evolution of stock: Linear Technology (Baker & Berkley)
3. The use of the cash balance
The effect to pay dividends to the shareholders has a double effect, the reduction of available cash in the balance sheet that is subject to corporate tax and a second effect in the share price due to the effect of reduction of current assets in the balance sheet. The first effect reduces the tax payments to the company and the second effect reduces the price of the stock. The earnings and earnings per share of the company are the same because dividends are paid after the earning calculation. I the case the shares are repurchased, the Assets maintain the same value but changes from Current Assets to Non-Current Assets and reduce the dividend payments to shareholders.
4. Firms and the dividend payment
The firms pay dividends to give an incentive to shareholders to buy and retain its shares and to obtain a tax benefit in the dividend payment. The rate dividend changed according to the value of the stock. An increase in the stock price by inflation or market condition requires an increase of dividend payment compared to other investment options in the market as bonds and securities.
5. Paul Coghlan recommendation
Paul Coghlan must recommend to the board to keep the dividends policy of the company. The dividend will depend on the stock price and earn per share of the company with a top ratio below 1%. The company must be aware that the market and the technology sector are cyclical, and it must be protected against another crisis, similar to 2001 and 2008.
Works Cited
Baker, Malcolm & Alison Berkley. «Dividend Policy at Linear Technology.» Harvard Business School (2004): 9-204-066.
House of Representatives. Congressional Joint Committee on Taxation. 2004. 10 April 2016.
