1. Purpose of mgmt. debating on the amount of dividend to be paid, corresponding to Q3 FY2003.

To create a positive perception of its growth prospects among the investors.

It is a sign of strong positive cash flows, profitability of the firm.
So firms remain cautious about their payout ratio, to sustain long run payments.
Ultimately, to maximize the shareholders value.

2. Findings of Academic research: A positive link between dividend yields & future returns.
Probably because paying out dividends increases tax burden on the firm.
This encourages management to make better investment with the cash available.

3. Incentivized to pay dividend only when firm is confident of the future.
So that investors will be sure of receiving regular dividends even during downturns.
As during that time, external interest rates fall significantly, even 1% dividend looks great.
Propels to increase the market-book ratio relative to non-paying ones.
Many Mutual Funds companies & Euro investment firms prefer stocks with regular dividends.

4. Restraint from Executive level employees.
These days technology companies follow a variable cost structure.
By making ESOPs as a considerable portion of their compensation & pay as per earnings.
So, those guys will try to exercise their options only when the stock price is at higher levels.
They will not be interested in the incentive of dividend payment.
As that exercise creates dilution, firms will buyback the shares to offset that effect.

5. It will not pay dividends if there are not enough cash earnings (after offsetting dilution).
Paying dividends without buybacks will hurt its EPS, though it provides cash to investors.

6. Restraint generated from own dividend payment policy during downturns (along with Iraq war).
For paying dividends, firms need cash reserves.
During economic slowdowns, interest rates will be pretty low; ruling out short term investments
In order to maintain cash position even at that time, firms will tend to buyback shares.

7. Restraint to dividend payout ratio from its strategic growth pursuit (Analog semiconductors).
Looking out for opportunities in Asia while being cautious about bottomline margin.
Investment in R&D ($102mn in FY2001), retaining talent, building fabrication facilities ($200mn).

8. In the wake of the tax reforms, institutional investors welcome dividend payment.
As it reduces the equity resik premium associated with the stock.
Corporate scandals like ENRON and WORLDCOM have reinforced this notion.

9. If the tax rates are expected to be constant atleast for a complete financial year.
Institutional investors would rather prefer buyback than dividend payments (to prevent tax).
In other words, they expect special dividends if the firms cash reserves are huge.

10. Few feel dividend policy as cos acceptance of the fact that investors can gain more elsewhere.

11. Lets see the policies of its benchmark competitors.
Intel, Maxim & Microsoft have all been following regular stock splits.
Maxim & Linear have got many similarities, along with institutional investors.
Microsoft promised to shift towards dividends after settling its legal claim worth $1.1 billion.
Linears position is 7
th
in terms of market capitalization on Philadelphia SOP index.

12. Keeping in mind its objective of maximizing shareholders value:
For long term relationship maintenance with investors who are concerned about bottomline.
Share price of Linear Technologu at the end of Q3 FY2003 was $30.87.
Market Cap at the end of Q3 FY2003 was (312.4*30.87) $9643.79 million.
Net Cash Flow during Q1-Q3 of FY2003: $13.2 mn; (POR)2002 = 54/197.6 = 27.33%
Total Cash & Short-term investments till Q3 FY2003: $1565.2 million.
EPS during Q1-Q3: 170.6/312.4 = 0.546

13. If the cash flow is used to buyback shares:
No. of shares bought back = 13.2 mn / 30.87 = 427,600
No. of New shares = 312.4 0.4276 = 311.97 mn
As share price remains constant, new Market Cap = 311.97 * 30.87 = $960.588 million
Post buyback EPS = 170.6/311.97 = 0.547
Change in EPS (post B.back) = 0.00075; Change in Market Cap (post B.back) = $13.2 million.
As Market Cap is reducing with this option, the only buyback policy is ruled out.

14. If the cash reserves are used to declare special dividend (Let us assume special DPS to be $2.5)
So, 2.5 * 312.4 million = $781 million has to be taken out of their cash reserves.
Share price will fall by $2.5 and the new share price (30.87 2.5) = $28.37
Change in EPS (post BB) = 0; Change in Market Cap (post BB) = -(311.92 mn * 2.5) = -$779.81 mn.
As Market Cap is reducing with this option, the only special dividend policy is also ruled out.

15. If part of the cash reserves are used to buyback & the other part to declare special dividend:
Let us assume that $500 million each is used for Dividend Payments & Share Buybacks.
For a guy holding 100 shares of LTC, now 5.18 shares will be bought back.
The guys initial stock value = $3087
Cash obtained from buyback = 5.18 * 30.87 = $159.91
Now, cash earned from dividends declared for remaining 94.82 shares = $160.06
Ex-dividend date value of the stocks held = 94.82 * (30.87 1.688) = $2767.04
The guys new share capital value = 159.6 + 160.06 + 2767.04 = $3087
As the shareholders value remains the same, while holders risk premium associated with LTC is
reduced, the part buyback part divident payment policy is most welcome.
But if Bushs 2003 tax reforms are delayed, this may not be as attractive as that of the BB policy.