Case 4B: Dividend Policy of Linear Technology
HBS Case 9-204-066.
In 1992, Linear Technology, a designer and manufacturer of analog semiconductors, initiated a dividend. The firm increased its dividend by approximately $0.01 per share each year thereafter. In fiscal year 2002, Linear experienced its first significant drop in sales since its 1986 initial public offering. Sales dropped by 47%, and profits fell by 54%. In the spring of 2003, CFO Paul Coghlan is deciding whether to recommend yet another increase in dividends to lift Linear’s payout ratio to 33.1%, high by the standards of technology firms.
You should provide a short report (not more than 5 pages, double-spaced) developed around the following questions:
- Describe the payout policy of Linear Technology.
- Why do firms pay dividends? Why has the rate of dividend initiations changed over time?
- Should Linear return cash to its shareholders?
- If Linear were to pay out its entire cash balance as a special dividend, what would be the effect on value? On the share price? On earnings? On earnings per share?
- What if Linear repurchased shares instead?
- What should Paul Coghlan recommend to the board?
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