Dividend Policy At Linear Technology Harvard Case Solution & Analysis

BACKGROUND

Robert Swanson, the owner of Linear Technology Corporation has founded the company in 1981 which is headquartered in Milpitas, California. The core business of the company is to manufacture the semi-conductors which are used in different electronic devices such as cellphones, digital cameras, complex medical devices, and navigation systems. In 2002, the market share of linear technologies was leaded by approximately 33% by the communication industry.

The main focus of Linear is on the analog products in the industry. They are designed to perform and fulfil the amendable power desiresin complex electronics which includes cellphones and digital cameras. Thus, the company has earned its customers’ confidence and satisfaction by giving them excellent quality products as well as exceptional customer care services.

The company has been making high profits in the past due to its efficient resource management as well the company is highly proficient in making business strategies. This trends of high profits has led the company to increase its dividend approximately by $0.01 per share each year. This also led the company to earn the confidence and support of its shareholders as they are pleased by the trend of increasing returns on their investments.

PROBLEM ANALYSIS

Since 1986, after engaging in Initial public offerings, the company has been performing very well in its business operations. But in the Fiscal year 2002, there is a drastic decrease in the profits of the company. The sales of the company had fallen by almost 47% as well as therewas also a decrease in profits of the company by almost 54%. The management of the company is worried as to what happened that had caused such change in the circumstances of the business.

Currently, in spring 2003, the Chief Executive Officer of the company, Paul Coghlan, is deciding the possible trend of the dividend of the company. He is trying to figure out the necessary changes in the dividend payout structures which are required because of drastic change in business circumstances.

CASE ANALYSIS

The company has an historic payout policy of paying $0.05/share as quarterly dividend. The company has also a trend of repurchasing shares using the additional funds in order to increase the value of shares of the company.

Because of the trend of repurchasing shares the company has been able to maintain its payout ratio around 15%. The company has maintained this ratio and enhanced this payout ratio to approximately 26% to 30%until 2002, because there were no significant changes in the business circumstances.

The cash flow statement of the company depicts that the company has currently approximately 1.5 billion dollars in cash. Since, the market is in recession and there are no investment opportunities in the market, where company can utilize this positive cash flow. Therefore, the management of the company has decided to use this positive cash flow of the company in paying out dividends for one time.

ANALYSIS OF DIVIDEND PAYOUT POLICY

The company has started paying its dividends in the second quarter of 1993. The dividend per share at that time amounted to $0.00625 whereas, the share price of the company at that time was $3.19, and this has amounted to almost 5.3 million dollars in total.

Dividend Policy At Linear Technology Case Solution

Moreover, initially, the company has set the quarterly dividend to $0.05 per share. It accounted for almost 15% of the earnings of 1993 fiscal year, and amounts to approximately $8.3 million. The company’s share price have been increasing over the time period since 1993, because of the trend of repurchasing of shares by the company itself, this has also increase the amount of dividend by the company.  The repurchases per year erratically dispersed from $0.06 to $0.36 in every economic quarter.

Dividend have a varying yield from 0.03% to 0.25% because of the uneven variation in the price of shares of the company. There is a drastic increase in the dividend per share over the decade. The dividend per share was 0.00625 when the company was at its initial and now it has reached to approximately 0.5 dollars.Since 2000, the dividend had started growing by almost $0.01 in every four financial quarters.

During the time period, the dividend policy of Linear has become sound and stable, this ultimately helps the company in increasing its customer base as well as it also attracts the prospective and potential investors to invest in the company. This also depicts the desire for growth of the company as well as the matureness of the company...................

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