Dividend policy at Linear technology Case Study

Dividend policy at Linear technology - Case Study Example The paper tells that Linear technology has used all four types of dividend distributions. The company has used stock splits four times since its initial public offer (IPO) in 1993, 1996, 1999 and 2000, each of which has been 2 for 1 split. The company has also had share purchases every year since 1993 and every year thereafter except in 2000. Most of these share repurchases were done in 2002 and 2003. The dividend policy that Linear Technology chooses at a particular point in time will depend on a number of factors. These factors include the signal it wants to send to its shareholders, the need for funds to invest in new projects, the type of shareholders that the firm has, and the amount of cash the firm has at its disposal. The method of dividend payment should also depend on the tax implications. Linear Technology does not appear to be investing in any new projects. The figures also indicate that research and development expenses have declined since it reached its peak in 2001. Th is signifies that the company has to a certain extent run out of ideas. It is therefore sending the wrong signal to its shareholders who may believe that the company’s growth prospects are good. The only technology company that showed signs of consistent growth over the period has been Microsoft. Linear seems to be totally focused on satisfying shareholders in terms of dividend payouts and maintaining a positive cash flow. There is no mention of any new projects or initiatives to grow the business. If Linear Technology wants to grow it could obtain a loan easily because the company does not currently have any debts. Furthermore, interest on corporate debt is tax exempt and the interest rate on AAA rated corporate debt has fallen every year since 1995. This may help to increase the value of the company and also increase the returns on shareholders funds. An advantage of using debt to fund growth is that interest paid on loans is allowable as a deduction for tax purposes while a dividend is not. Funding Requirements Linear technology desires to have sufficient cash flows so that the company can withstand any financial crisis. The company however, has the capacity to obtain debt. Linear technology manages it payroll expenses by issuing stock options to compensate employees. Therefore, when the company does well employees receive a higher profit share and so the company is able to maintain a positive cash flow as well as pay out dividends on a quarterly basis. Available Resources The company has a significant amount of cash available and this can be backed up with its capacity to borrow. Linear currently has over $1.5m in cash and short term investments. This may not however, be sufficient to finance a major project but would become useful in the company’s bid to obtain a loan as it would provide a cushion in the event that the company is not able to pay interest expenses out of regular earnings. Costs and Benefits of Retaining Excess Funds Retaining excess funds can result in agency costs. Managers may be tempted to pay themselves excessively. It is more likely that they may not exercise care in the use of such funds since the pressures that normally arise from having limited funds do not exist. This lead to a waste of funds that could have been used to pay dividends. The benefits of retaining