Dividend Policy at Linear Technology
This case presents a decision to be made by management of Linear Technology about their dividend policy.
Company is 7th largest by market capitalization in the SOX. Linear technology went public in 1986 and declared first dividend on October 13, 1992. Dividend amount is $0.05 per share quarterly and there were 4 stock splits for now. Management have to decide whether to increase dividend since they have $1565.2M in cash or use it for share repurchase. The company has to analyse these two options to decide which is better for them and will enhance value of the shareholder.
There are few minuses in paying out cash as dividends. First is ...view middle of the document...
Stock repurchase, on the other hand, does not provide shareholders with clear information how much money they can receive as profit, but tax rates of capital gain is lower, so company saves money on taxes. Besides, in the industry company operates in it is very important to have long-term engineer employees so they can keep working on improving existing and making new semiconductors, and stock option compensation is quite efficient way to keep employees.
If the company will use all the cash to repurchase shares, share price will jump up to $136.85 per share($30.87(share price)*312.4M(# of shares outstanding) divided by (312.4M(# of shares outstanding – ($1565.2M(cash)/$30.87(price per share)). This price change may be significant as company is trying to keep share price at certain level so it is affordable for greater variety of investors. Including the fact that company used to use more money for stock repurchase than to dividend payout more often so I would reccomend to use twice money as was used to pay dividends.
Regarding the concern whether or not to increase Dividend Payout Ratio it is obvious that dividend policy of Linear Technology was such to show to investors that buying shares of the company...