Part I
Linear Technology supplies products across various industries, allowing them sustain a vast amount of customers (Appendix 1). In terms of their financials, Linear went public on the NASDAQ in 1986. Shortly after their company announced its IPO, Paul Coghlan was announced as the company’s CFO. Linear has shown good performance with stable margins and strong growth. However during 2002 a decline in demand for its products hurt Linear’s net income and sales, forcing them to change their fixed to variable cost ratio by re-structuring their compensation strategy and rewarding their employees through profit sharing (stock options). There are various issues that we managed to identify in this case. Historically Linear has been increasing its dividend at a steady rate of $0.01 per year. In this case, Paul Coghlan faces the issue of whether Liner should continue to increase its dividend and issue a special dividend for this quarter (2003 Q2) based on their weak financials in 2003. We identified a variety of factors that might induce Mr. Coghlan to change Linear’s dividend policy in appendix 2.
Part II
Linear Technology has a very clear payout policy which is to increase dividends by $0.01 per year every year However, their payout policy doesn’t solely revolve around dividends, it also involves share buybacks. The purpose of these buybacks aren’t just to distribute cash to shareholders but to also offset exercised stock options by the employees.
As noted in the case, their initial payout ratio was 15%. However, when they considered increasing their dividends, they wanted the payout ratio to be 25% to 30%. The issue at hand is whether or not they can keep a consistent payout even with their drop in sales and earnings in 2003. T...
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Appendix 8:
Appendix 9:
This graph shows the market reaction (Cumulative Abnormal Return) shortly after dividend decrease (left) and increase (right) for a specific company. Source: NYU Stern
Appendix 10:
Appendix 11:
Appendix 12:
References
Bagwell, Laurie Simon, and John B. Shoven. "Cash Distributions to Shareholders." Journal of Economic Perspectives 3.3 (1989): 129-40. Print.
Floyd Norris, “Growing Number of Companies Choose Not to Offer Dividends”, The New York Times, January 4, 2000.
Ken Brown and Jesse Eisinger, “Tech Dividends Deserve Closer Look”, The Asian Wall Street Journal, January 13, 2003.
Richard Teitelbaum, “Investor’s Guide 2003: Playing the Dividend Market,” Fortune Magazine, December 3, 2002.
"Revenue and EPS Summary." Revenue, Earnings Per Share (EPS), & Dividend Summary. NASDAQ, n.d. Web. 03 Apr. 2014.
Looking into this further, one can see why this ratio decreased, as the basic earnings per share increased from $5.46 to $6.45, meaning that this decrease in Price/Earnings is not necessarily a bad thing. Dividend yield percentage, however, did increase. Increasing from 1.88% to 2.0%, this shows that The Home Depot is rewarding its stockholders with a higher percentage of dividend payout. Dividend payout percentage decreased from 43.24% to 42.78%, resulting in a lower percentage of net income being paid to stockholders through cash dividends. This seems backwards considering dividend yield percentage increased, but this is actually the result of a higher increase in net earnings.
Frydman, C., & Saks, R. E. (2010). Executive Compensation: A New View from a Long-Term Perspective, 1936-2005. Review Of Financial Studies, 23(5), 2099-2138.
A very slim minority of firms distribute dividends. This truism has revolutionary implications. In the absence of dividends, the foundation of most - if not all - of the financial theories we employ in order to determine the value of shares, is falsified. These theories rely on a few implicit and explicit assumptions:
Berk, J., & DeMarzo, P. (2011). Corporate finance: The core, second edition. (2nd ed.). Boston, MA: Prentice Hall.
DuPont is a very big company with a low debt policy designed to maximize financial flexibility and insulate operations from financial constraints. It is one of the few AAA rated manufacturing companies due its investments are primarily financed from internal sources. However, because prices fell in the 1960’s thus DuPont’s net income fell also. The adverse economic conditions in 1970’s escalated inflation: increase in oil prices increased required inventory investments of the company. 1975 recession negatively affected DuPont’s net income by 33% and returns on capital and earnings per share fell. The company cut dividends in 1974 and working capital investment removed. Proportion of debt increased from 7% in 1972 to 27% in 1975 and interest coverage falls from 38 to 4.6. The company perceived increase in debt temporary but moved quickly to reduce its debt ratio by decreasing capital expenditures. Debt proportion dropped to 20%, interest coverage increased to 11.5 by 1979.
“Price-Earnings Ratio – P/E Ratio.” Investopedia. Investopedia US, A Division of IAC., n.d. Web. 25 March 2014.
Agency costs theory states out those dividends alleviate funds under the administration control thus reducing the chances of managers to use the cash in their individual interest. Dividends can also refrain managers’ tendency in case of over investing. The Jackson company dividends payout serves to decrease the disagreement between the shareholders and the managers over conflict of interest. The dividends payout for Jackson firm poises as a device to inform the investors about the future prospects of the company. The investors can use the information in the determination of the company’s share price. The Jackson company decide to give a high dividends of $400 in the year 2013 bearing in mind that dividends enhances the value of the firm. The bank should not agree with the payout since this affect the cash flow. In return it will have adverse effect on the repayment of the loan that the company took from the bank. This can also leads to liquidation that can greatly affect the bank and other investors. The appropriate dividends payout for Jackson Company could be $200 that will not adversely affect the cash flow the
Is The Tyranny Of Shareholder Value Finally Ending? N.p., n.d. Web. The Web.
New York Times, p. 1. http://www.nytimes.com/2009/09/09/business/economy/09leonhardt.html?_r=1 Lipman, Marc. A. A. Personal Interview. March 21, 2010. Marano, Hara E. (2004).
In addition, Fama EF also conclude that more and more listed firms choose not to pay dividend is mainly due to the tax disadvantage. Although there is increasing number of stock repurchase showing up. Fama EF mentioned that it cannot be seen as a replacement of dividend under two circumstances, i) when it’s reissued to employee stock ownership plans or executive stock options, ii) when its reissued in a merger case.
In mid September 2005, Ashley Swenson, the chief financial officer of this large CAD/CAM equipment manufacturer must decide whether to pay out dividends to the firm¡¦s shareholders or repurchase stock. If Swenson chooses to pay out dividends, she must also decide on the magnitude of the payout. A subsidiary question is whether the firm should embark on a campaign of corporate-image advertising and change its corporate name to reflect its new outlook. The case serves a review of the many practical aspects of the dividend and share buyback decisions, including(1) signaling effects, (2) clientele effects, and (3) finance and investment implications of increasing dividend payout and share repurchase decisions.
In 1986 and 1987, MiniScribe ranked top 25%, then declined slightly to the median in 1988. The reason for the decrease in 1988 can be the drop of the net income or the increased competition in the market. The results may be acceptance at first glance, but if we take our analysis in the profit margin to this ratio, it can be found that MiniScribe’s return on stockholders’ equity was actually lower than the number they provided. The Company had a history of using various kinds of methods to “make the number” instead of creating the maximum value of shareholders’ equity. From the long-term point of view, this will harm the shareholders’
This paper will discuss how a manager may decide a minimum acceptable rate of return will be for investors. The three models, dividend growth, CAPM, and APT will be analyzed as to each model’s ease of use and effectiveness and applied to General Mills, Inc. Additionally, some companies’ financial information will be compared using the CAPM model, to determine which company has the higher cost of equity and a conclusion will be made as to the effectiveness of these models.
Brealey, Richard A., Marcus, Alan J., Myers, Stewart C. 1999, Fundamentals of Corporate Finance, 2nd edn, Craig S. Beytien, USA.