it is a presentation on case analysis of the case dividend payout policy of linear technology and about its decision whether it should pay more dividend or keep it constant
3. COMPANY BACKGROUND
THE COMPANY THAT WE ARE ANALYSING IS LINEAR TECHNOLOGY
CORPORATION
A SEMICONDUCTOR TECHNOLOGY(IC) FIRM FOUNDED BY ROBERT
SWANSON(CEO) IN 1981
CFO IS PAUL COGHLAN
COMPANY HAS BEEN PROVIDING DIVIDEND SINCE 1992
COMPANY HAD SET IT LOW IN BEGINNING AS IT DIDN’T WANT TO LOWER
ITS DIVIDEND AS ACCORDING TO COMPANY:-
“ PEOPLE LOVE DIVIDEND BUT HATE IT WHEN COMPANIES STOP GIVING IT”
THE COMPANY HAS BEEN CONSISTENTLY PAYING DIVIDEND SINCE THEN
COMPANY HAS EVEN PERFORMED IN HARD TIMES
4. COMPANY BACKGROUND
COMPANY HAS ALSO BEEN BUYING SHARES BACK FOR EMPLOYEE
STOCK OPTIONS
JANUS CAPITAL IS THE LARGEST SINGLE SHAREHOLDER OF
LLTC(EXHIBIT4)
THE COMPANY MAKES ANALOG CIRCUITS WHICH ARE
MANUFACTURED IN FABRICATION FACILITY KNOWN AS ANALOG FAB
COSTING (~$200 MILLION)
ANALOG FAB CAN BE USED FOR 10 PLUS YEARS WITHOUT BECOMING
OBSOLETE , RESEARCH EXPENSES ($102 MILLION)
LINEAR WAS 7TH LARGEST COMPANY BY MARKET CAPITALIZATION IN
PHILADELPHIA STOCK EXCHANGE SEMICONDUCTOR INDEX(SOX)
5. COMPANY BACKGROUND
LINEAR’S SALES, GROSS PROFIT AND NET INCOME PEAKED
IN FY 2001
BUSINESS SLOWED DONW CONSIDERABLY IN FY2002 AND
LINEAR COULD ONLY EARN $198 MILLION AS COMPARED
TO $427 MILLION PREVIOUS YEAR (EXHIBIT 2)
LTTC HAS A CASH RESERVE OF ROUGHLY $1.5 BILLION
OUT OF WHICH SHORT TERM INVESTMENTS ARE MADE
WHICH ARE ONLY YIELDING A TOTAL $52 MILLION WHICH
IS JUST 3.4 % .
SOME INVESTORS ARE ASKING COGHLAN TO GIVE SOME
SORT OF SPECIAL DIVIDENDS
6. SHOULD LINEAR TECHNOLOGY INCREASE ITS
DIVIDEND , KEEP IT CONSTANT OR DECREASE IT?
PROBLEM DEFINITION
7. CONCEPTS REQUIRED FOR
PROBLEM SOLVING
DIVIDEND PAYOUT IS NOT MANDATORY
DIVIDEND PAYOUT GIVES A SIGNAL TO THE MARKET THAT COMPANY
IS PROFIT MAKING
PEOPLE START TO LOSE THEIR FAITH FROM FIRMS AT THE TIME OF
RECESSION
GORDON’S MODEL
BUYBACKS ARE MORE FLEXIBLE THAN DIVIDEND
PEOPLE HATE IT WHEN A DIVIDEND WHICH WAS PAID IS REDUCED OR
STOPPED
8. GORDONS MODEL
ACCORDING TO GORDON’S MODEL
𝑃 =
𝐸𝑃𝑆(1−𝑏)
𝑘−𝑏𝑟
P= MARKET PRICE PER SHARE
EPS= EARNING PER SHARE
r= FIRM’S RATE OF RETURN
k=FIRM’S COST OF CAPITAL OR CAPITALISATION RATE
b=FRACTION OF RETAINED EARNINGS
DIVIDEND= EPS(1-b)
9. GORDONS MODEL
WHEN , r>k GROWTH FIRM
WE SHOULD LOWER / STOP PAYING DIVIDEND
WHEN , r=k NORMAL FIRM
CAN PAY OR HOLD THE DIVIDEND IT WILL NOT AFFECT OUR PRICE OF
SHARE
WHEN , r<k DECLINING FIRM
SHOULD PAY HIGHER DIVIDEND
10. COMPANY’S DATA
DIVIDEND THAT COMPANY IS PAYING PER SHARE = $0.05
STOCK REPURCHASE OF $66.5 MILLION IN Q4 2002
STOCK REPURCHASE OF $125 MILLION IN Q1 2003
STOCK REPURCHASE OF $1.5 MILLION IN Q2 2003
21. SOLUTION AS SOUGHT BY FIRM
LINEAR TECHNOLOGY HAS TAKEN DECESION OF PAYING CONSTANT
DIVIDEND OF $0.05
22. OPTIONS THAT LLTC HAD
LLTC BEING A FIRM WHICH HAS BEEN MAKING PROFITS IN THE TIME OF RECESSION TOO ,
HAS A STRONG CAPITAL POSITION TOO AS WE CAN SEE FROM EXHIBIT 2 CASH AND
SHORT TERM INVESTMENTS STAND APRROX $1565.2 MILLION
AND ALSO AS WE HAVE EARLIER READ THE RETURN ON INVESTMENTS WERE VERY LOW
PEOPLE LOVE DIVIDENDS, AND BECOMING RISK FREE
PEOPLE LOSE THEIR FAITH IN COMPANY’S AT THE TIME OF RECESSION
SO FIRM BASICALLY NEEDED TO :
1. SHAREHOLDERS WEALTH MAXIMISATION
2. MAKE COMPANY’S POSITION STRONG IN PEOPLE’S MIND
3. INCREASE SHARE PRICE
4. DO SOMETHING USEFUL OF STAGNANT CASH
5. BUY BACK SHARES
23. OPTIONS THAT LLTC HAD
1
THUS WE COME TO 3 ALTERNATIVE DECESIONS
1. CASH FLOW IS USED TO BUY BACK SHARES
2. CASH RESERVE IS USED TO PAY SPECIAL DIVIDENDS
3. IF A PART IS USED FOR BUY BACK AND PART FOR
SPECIAL DIVIDEND
1= ADAPTED FROM A RESEARCH BY Tarun KSG, Saurabh Thadani, Srikanth Konduri, Tushar Gupta ,Nikhil Gupta
24. 1) CASH FLOW IS USED TO BUYBACK
SHARES
NET CASH FLOW IS : $13.2 MILLION
PRICE PER SHARE IS : $30.87
TOTAL SHARES BOUGHT : 13,200,000/30.87=427,600
NEW NUMBER OF SHARES = 312,400,000-427,600=311,972,400
POST BUY BACK EARNING PER SHARE =
170,600,000/311,972,400=$0.5468
EPS BEFORE BUY BACK =$0.546094 ∆𝐸𝑃𝑆 = 0.0007
∆𝑴𝑨𝑹𝑲𝑬𝑻 𝑪𝑨𝑷𝑰𝑻𝑨𝑳𝑰𝑺𝑨𝑻𝑰𝑶𝑵 = −$𝟏𝟑, 𝟐𝟎𝟎, 𝟎𝟎𝟎
AS THIS REDUCES MARKET CAPITALISATION THIS OPTION
CAN BE NEGLECTED
25. 2) CASH RESERVE IS USED TO GIVE
SPECIAL DIVIDEND
NET CASH RESERVE IS : $1565.2 MILLION
PRICE PER SHARE IS : $30.87
TOTAL SHARES : 312.4 MILLION
LET US ASSUME WE PAY $2.5 PER SHARE AS SPECIAL DIVIDEND
POST DIVIDEND PRICE PER SHARE = 30.87-2.5=$28.37
TOTAL AMOUNT PAID = 2.5X312,400,000=$781 MILLION
EPS BEFORE BUY BACK =$0.546094 ∆𝑬𝑷𝑺 = 𝟎
∆𝑴𝑨𝑹𝑲𝑬𝑻 𝑪𝑨𝑷𝑰𝑻𝑨𝑳𝑰𝑺𝑨𝑻𝑰𝑶𝑵 𝑷𝑶𝑺𝑻 𝑩𝑼𝒀 𝑩𝑨𝑪𝑲 = −$781 MILLIOM
AS THIS REDUCSES MARKET CAPITALISATION THIS OPTION CAN BE
NEGLECTED
26. 3) IF A PART IS USED FOR BUY BACK
AND PART FOR SPECIAL DIVIDEND
LET US ASSUME THAT WE USE $500 MILLION EACH TO BUY BACK SHARE AND FOR SPECIAL DIVIDEND
TOO
PRICE PER SHARE IS : $30.87
SO FOR $500 MILLION WE CAN BUY 500,000,000X100/30.87X312,400,000=5.18%
HENCE FOR A PERSON HOLDING 100 SHARES WE WILL BUY BACK 5.18 SHARE AND HE HAS 94.82
SHARES AND BUY BACK YIELDS 5.18X30.87=$159.9066
NOW THE DIVIDEND EVERY SHARE GETS = 500,000,000/296817680=$1.688
HE EARNS IN TOTAL 94.82X1.688=$160.06
PRICE PER SHARE AFTER DIVIDEND =30.87-1.688=$29.182
SHARE PRICE OF SHARES WITH SHARE HOLDER=29.182X94.82=$2767.04
TOTAL CAPITAL VALUE OF SHARE HOLDER=159.9066+160.06+2767.04=$3087
AS SHAREHOLDERS VALUE HAS REMAINED SAME , AND RISK ASSOCIATED WITH LLTC IS REDUCED
THIS WILL BE MOST BENIFICIAL FOR SHAREHOLDERS
BUT THIS WILL ONLY BE GOOD IF THE TAX REFORMS STAY
27. DECESION COMPANY TOOK ABIDED THE COMPANY POLICY BUT
COULD HAVE BEEN BETTER FINANCIALLY
THEY SHOULD EITHER HAVE REDUCED THE DIVIDEND (
THEORETICALLY)
ELSE THEY SHOULD HAVE PAID SOME AMOUNT FOR SPECIAL
DIVIDEND AND SOME FOR BUY BACK
HENCE WE UNDERSTAND FIRM TOOK A
GOOD STEP BUT IT COULD HAVE BEEN
BETTER
28. REFERENCES
WWW.HERITAGE.ORG
WWW.WIKIPEDIA.COM
WWW.TIMESOFINDIA.COM
TEXTBOOK BY IM PANDEY
RESEARCH PAPER BY CHRISTOPHER TAYLOR
PRESENTATION BY TARUN KSG, SAURABH THADANI, SRIKANTH
KONDURI, TUSHAR GUPTA ,NIKHIL GUPTA
RESEARCH PAPER ON DIVIDENDS AND CORPORATE SHAREHOLDERS
BY MICHAEL J. BARCLAY, CLIFFORD G. HOLDERNESS, DENNIS P.
SHEEHAN.