Board of Directors, Linear Technologies Essay Example for Free

Board of Directors, analog Technologies EssayBased on the financials to date and the forward looking capital investments required Linear should increase their dividend payout by $0.01 per share. Entering the fourth quarter of 2003 the market seems to show continued signs of improvement. The union has shown steady growth and revenues are anticipateed to exceed 2002s by 19%. The forecast shows net income coming in at $222.7m a robust 12% increase over last year. Linear has however increased its cash holdings to be in excess of $1.5b through various management initiatives. However this $1.5b has only shown investors a 4.25% growth which translates to $0.10 earnings per share pre- evaluate. This is in line with the companys history of conservatism. expression ahead the company does seem to have requirements to build a new fabrication facility as their facility is aging and is nearing its efficacious use in its life cycle and will cost around $200m. Linear seems to have enough ca sh on hand to be satisfactory to invest their cash without leveraging the company too much in the future. They have also not spent much on capital expenditures as a percentage of sales (2.2% in FY2002) this last year and should look to increase that in the future.By looking at the information above in the table we see that Linear has had a coarse history of paying a dividend and has ample resources to pay out dividends Thus making them one of the highest in their industry as noted in the table below. The other survival of the fittests show extremes in the industry and prove to be too removed out in that location in terms of this industry. Technology companies are known for investing their cash in RD as swell and Linear needs to be aggressive in using its cash reserves in a higher and better use that will in turn show investors more returns as well as provide a health dividend amongst their peers.This is in line with what their investors have come to expect over the last 3 year s and any of import adjustment now would not signal well in the markets. This increase would raise their dividend payouts to over $66m (a 22% increase from FY2002).History/Analysis of the Dividend Policy at LinearLinear management started issuing dividends when they were sure of the sustainable profitability and cash flow and understood that if they started a dividend that they would have to maintain this in the long run. They understood that investors dont react well when a company stops paying a dividend. Hence starting small at and gradually increasing the dividends over time as seen in the chart below while the dividend give took a large hit in 2000 and rebounded in 2002. (Starting at $0.00625 dividend per share in 1992 after they went public in 1986 to a high of $.05 per share today)The Primary reasons to start issuing the dividend highlighted by the management were Company is financially well positioned with the sustained cash flow since IPO Show investors that Linear is a less risky investment (compared to other tech firms) Tap in the investors interested in income goals along with growth goals (more attractive than the low bank interest instruments) Management feels that increasing the dividend every year even during a uncompromising economic time was good signaling.One thing to note is that Linear did not just limit itself to dividends only also leveraged the share buyback (based on the market conditions), as a vehicle to give cash back to the investors. In 2003, company has recovered ($198m net income) from the 2001 recessionary slump but mum more than 50% below the peak in 2001 ($427m net income.) Moreover, sales and profit grew at 3% and 7% respectively are still far below 2001 levels. Dividend payouts make the stocks less volatile too. On the other hand, when a technology growth company start paying dividend it can be think that company believes that shareholders can make higher return by investing somewhere else.Porters 5 Forces to date D ividend and buyback policies at Linear Overall Market Big market scandals, Enron and World-Com were cooking the accounting books to show growth. Every year an investor can get the real money from the dividend (a bird in hand,) but stock growth is just on paper (two birds in the bush, believeing the recent big accounting scandals). Even the Fortune article in 2002 suggested that vent forward a growing share of investment returns willbe from the dividend income.Simple Proposal Raise by $0.01The goal of payout policy is to ensure that bullion are allocated optimally across firms and their investors. Having said that, several facts speak in favor of raising Linears dividend by one cent and not swinging the pendulum in one direction or the other. Excess cash-to-operations approach for 2003 ( source three quarters) Dividends paid $47 zillionOperating Cash Flow $180.1 million with the majority of cash going towards stock repurchases. ($165.7 million) while $13.2 million ended up on the firms repose sheet. With 312.4million shares outstanding, Linears surplus expenditures with a $0.06 dividend would be $3.1million per quarter or $12.5million annually. Given the corporations financial situation, this is perfectly feasible as seen in the chart below.This would slightly heighten the dividend yield as seen in the charts below. The company has a very beardown(prenominal) cash balance of over $1.5 billion in which to strategically invest In view of the upcoming changes in tax law, raising dividends enjoys support from major shareholders It could potentially help attract additional investors, such as mutual bills and European investment firms It would be consistent with the firms dividend payout history the dividends have been increasing by one cent every year since 1999 The company is not planning any major acquisition for which cash would be requiredMiddle-ground proposal Send 1/3 FCF to Dividends, 1/3 FCF to buybacks An option to balance the historical and the pa th forward for dividend pay would be to adopt the idea of paying one third of their earnings per Blaine Rollins, leader portfolio manager of Janus Fund. For companies with fast(a) excess cash flow such as Linear, I would suggest saving a third of the cash for a rainy day and communion the other two-thirds with investors, split equally between dividends and buybacks. Heres the historical data of the actual paid and the percentage of their excess cash flow If we sweep up the advice from Rollins, heres the middle ground proposal allocating 1/3 of excess cash flow towards dividends. Assuming the Q4 will be similar to the first 3 quarters in 2003, we can estimate that the net income to be $227.5Mand FCFE to be $240M. By taking 1/3, we can recommend dividend for 2003E (estimate) would be $80M. The dividend yield would increase slightly from .4% to .6% a well in the charts above.EconomyDue to the recession in 2001, the overall economy is not growing strong but theres no clear sign of a major decline. SP500 has remained steady over the past few years and with a favorable tax plan, it a signal to the investors that Linear remains a great investment opportunity when people are generally trying to hold on to their cash. constancyAlthough this is still higher than the industry standard, Linear has maintained a strong cash balance and by rewarding the investors, with a high dividend, it would signal strong growth and attract future investors looking for steady income revenue. This would also be a point of differentiation amongst its competitors and allow Linear to stand out amongst the crowd. However, a concern is a potential message that there is no future growth RD/projects in the pipeline. Linears current circumstanceLinear is in a strong financial position to pay aggressive dividends and theres no apparent risk in increasing dividends to the company. However, some factors to consider are potentially missing out on capital growth investments and executive pay restri ctions.Radical Proposal Distribute All CashA radical proposal for Linear Technology would be to distribute all of their cash. Taking this to the extreme, it would include the $1.5 billion cash balance they currently have as well as paying all of their cash flow for each of the subsequent years. The $1.5 billion they have on hand would provide a dividend of some $5.00 per share. This would represent a dividend yield of 16.2%. If they chose to continue this policy on a going forward basis it would provide a very volatile dividend. Looking at the past ten years of data, this strategy would give investors a dividend between $0.13 and $1.34 per share.EconomyThe economy still hasnt rebounded from the recession of 2001. Although Linear Technologies had never had a year with negative cash flow, there was significant uncertainty in the market and by distributing all of their cash they would be in a position where they could not make a mistake if it fell further. IndustryThis would imply to investors that they do not have growth opportunities that would provide investors attractive returns. Investors take to have a predictable dividend, by doing this they would create uncertainty in their dividend policy in the future. Even if they decided not to payout all of their cash every year, by doing it one year they risk setting a precedent that if cash gets to $1.5 billion it will be used for a dividend. This would provide a dividend yield to investors of 16.2%. This is significantly higher than the 0.3% average for the Information Technology sector as a whole. Moreover, if they continued this policy moving forward they would continue to get wind themselves from the other tech firms by having a much higher dividend yield. Linears current circumstanceThey run the risk of missing out on opportunities for acquisitions or investment in their existing business. Even if they didnt see opportunities at the current time, starting the year with a zero cash balance would greatly dimi nish their ability to finance any expansions or acquisitions. They would be forced to finance those opportunities through debt or raising new equity.