Situation Analysis
Founded in 1981 by Swanson Robert. The focus of the company was to design, manufacture and market built in circuits used in electronics like mobile phones, sophisticated medical equipment and digital cameras.Its chief financial officer was Paul Coghlan.
They (management) had remunerated dividends every quarter since then. Liner’s administration and board debated in relation to increasing the dividend in the year 2002 amidst its drop in sales and income, they eventually decided to go on with the augment in order to authenticate capability to be gainful and its cash flow positive even in harsh periods. The CFO explained that, they knew their payout ratio would be nearer to 25% to 30%, but continued to remain certain about their company prediction and their cost make-up could be refunded to shareholders in the form of split repurchases. In some other years Linear distributed radically more ready money to share repurchase than to dividends. Back shares are to counterbalance the exercise of worker stock options. A different factor was conditions the market. He thought-out the valuation of Liner’s stock and the repurchase on cash balance. For the past few years rates of interest have been so stumpy that our money was not earning large amount interest revenue in the high-grade.
Despite the situation, the company had accumulated a huge cash balance over the time. There was no strategy to make an acquisition. Although the company was a star performer in its individual Niche, Cash as well as short-term investments exceeded $1.5 billion. Interest- income in the year 2002 equaled $52 million. Some of the company’s investors had urged him to maintain some of this cash, perhaps as special dividend, but he had the impression that this feeling wasn’t widespread. Janus Capital was the prime single owner of linear stock. No person held more than 1% of shares.
Key issues relevant to the dilemma
It was in April 2003 moreover, Paul Coghlan was pulling jointly his notes for the company’s board meeting the subsequent day. He and the CEO Robert Swanson were delighted with the company’s financials performance for the year 2003, but sale plus net proceeds still remained considerably below Liner’s projected income. Furthermore, the manufacturing expertise was still mounting from a recessionary situation and it was not clear how tough business would be for the remaining part of the year. Factories and no single person customer’s explanation for supplementary five % of its business. In 2002, the transportation industry accounted for 33% of Liner’s business, computers 27%, automotive 6%, and the remaining 34% was widening across many dissimilar applications. Linear paying attention on the analog segment within the broader semiconductor industry. Analog products were custom bought for each application and were also used to perform functions like regulating power needs in complex electronics like mobile phones and digital cameras. Competition among analog computer companies was based in part on hire and maintaining top engineers who would continuously develop high-performance products. Capital investment in original fabrication facilities. Was also important, although the cost of a new analog fab (~$200 million) was substantially below that of a digital fab, such as those being built by Intel (~$2 billion). In addition, analog fabs could be used for 10-plus years, while digital fabs often become obsolete within three to five years.
Research and development expenses were also modest, peaking at $102 million in fiscal year (FY) 2001. Within the analog segment of the industry, Linear competed with National Semiconductor. Linear was the seventh-largest company, by market capitalization, in the Philadelphia SES Index (SOX).
Financial History
Linear became a public company on the NASDAQ in 1986. The company has divided its stock four times since its IPO. Coghlan was then hired as the CFO immediately after the company was declared public. Shareholders had rewarded Linear for solid growth and steady margins over the years. Liner’s sales, gross profit and net income peaked in FY 2001 when technology spending worldwide was at an all-time high. Business slowed down considerably in FY 2002, and Linear finished the year with net revenue of $198 million relative to $427 million from the previous year.
Linear detained its limitations through cost- cutting and work shutdowns. Unlike most organizations within the industry, Linear had set up a variable- cost structure in its early existence. A large portion of remuneration was profit sharing; in 2001, some laborers got a 70% increment in their total compensation and in 2002, the ratio of profit sharing was set at a much low level. Worker stock options were also a major element of compensation for linear employees. These forms of variable compensation helped Linear maintain a positive cash flow in down years.
Financials report for the first- three quarters of financial year 2003 indicated a few growths. Sale for the first Half of FY 2003 was $287 million as opposed to to $241 million for the first half of FY 2002. In the company’s announcement of its FY 2003 2Q numbers, Swanson had estimated that sales and profits would grow 3% to 7% over the next quarter. As Coghlan look at the statistics of FY 2003 3Q, that would be communicated the subsequent week, he was satisfied to observe that the expansion was really in line with estimates from the previous quarter. Nevertheless, the numbers were still far below the 3Q financials for fiscal year 2001 and management did not see a clear path to reaching those levels again in the next year. In addition, the U. S had just declared war on Iraq and it was unclear how the war would affect the economy in the U.S. and abroad. Linear was searching for new business opportunities in Asia, but the company was careful not to sacrifice its margins for top-line sales growth. The company announced its first dividend on 13/10/1992. Coghlan explained:
We knew that the analog market was a first-class business in addition to that Linear was well- positioned in the factory. We had been having cash flow which was positive since our IPO and we sought to show investors the fact that buying stock in Linear was not as facing the same risk as risky as buying shares in most technology y around. Other companies.
Furthermore, we had a strong believe that offering a dividend would give us reach to a new set of investors that had income goals in addition to growth goals. Dividend- payers consisted of superior, more continually profitable firms, with slower development in sale and property and fewer prospect growth opportunities. Some market analysts had the feeling that many Technology firms were only “just beginning to arrive at the phase at which paying dividend become possible. As a corporation establishes a regular and conventional cash stream from process, then it normally considers whether to take some of back that cash to its shareholders.
Substitute solution to the quandary
Contrasting dividends, repurchases are more bendy, in component because they are unrestricted and once announced, could not for all time be implemented. But most analysts said that being with less flexibility and less liquid to throw into new investment or acquisition may not be all that bad, forcing a measure of moderation on companies dedicated to acquisitions. A related concern is how a corporation wants shareholders to perceive its enlargement opportunities. As per David Reader man, the executives shall be watchful about signaling to the market in which their growth rate is slowing, that is what a dividend is usually perceived to be as doing. Managerial stock option Even huge, stable and money-making technology organizations tended to distribute dividends. One stubborn factor seemed to be the weighty use of share option reimbursement in this sector. With the better part of their pay in options, management may have little motivation to pay dividend, since options turn out to be more valuable the more the stock price goes up, but do not gain from dividend expenses. Moreover, as a matter-of-fact, many technology companies use their available money to repurchase shares to cancel the dilution created when laborers work out their options. If companies instead pay out their money in the outward appearance of dividends, then their stock exceptional will continue to increase in value, which is an indication that their income per carve up will defoliate—even as dividend absorbs ever more money.
Taxes
In the US, corporate earnings have been taxed double, at the company level and the shareholder level. In January 2003, The then leader George W. Bush wished-for a fundamental change to the taxation of speculation income. The plan was to get clear of duty on dividend, that is, if they were rewarded out of income that had previously been taxed. The early proposal in addition included an alteration to the wealth gains tax. Every investor’s tax foundation would increase by retained earnings per share.
Market valuations
The worth of dividend payers as well as nonpayer mottled over time. Because the midpoint of 2000, the proceeds of bonus payers had outstrip those of nonpayer with a large margin. The semiconductor manufacturing was no exclusion. These proceeds, as well as the rouse of the current corporate scandal at Enron as well as WorldCom, had brought out interest in dividend-based investment. In late 2002, a Fortune article explain that, going concern, the theory hold, a rising proportion of proceeds will come from returns more willingly than from assets gains, and investor will group to shares that produce dividends.
Final proposal
In conclusion liner’s dividend policy was helpful to the organization because like any other policy in an organization it helps to create rules of conduct in the organization. In the context of linear it serves as a guide to the company when it comes to distribution of dividends It also helps to reduce conflict between the management and the shareholders as well as between management and the employees.