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.
Case Questions
You should provide a short report (not more than 5 pages, double-spaced) developed around the following questions:
1. Describe the payout policy of Linear Technology.
2. Why do firms pay dividends? Why has the rate of dividend initiations changed over time?
3. Should Linear return cash to its shareholders?
4. 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?
5. What if Linear repurchased shares instead?
6. What should Paul Coghlan recommend to the board?
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