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FINANCIAL MANAGEMENT

CASE ANALYSIS
CASE 2 : DIVIDEND POLICY AT LINEAR TECHNOLOGY

BY
AAYUSHI SHARMA
DEEPALI GUPTA
JASPRRET SINGH
KARAN SHARMA
VIKAS DHIMAN
COMPANY BACKGROUND
THE COMPANY THAT WE ARE ANALYSING IS LINEAR TECHNOLOGY CORPORATION
A SEMICONDUCTOR TECHNOLOGY(IC) FIRM FOUNDED BY ROBERT SWANSON(CEO)
IN 1981
CFO IS PAUL COGHLAN
COMPANY HAS BEEN PROVIDING DIVIDEND SINCE 1992
COMPANY HAD SET IT LOW IN BEGINNING AS IT DIDNT WANT TO LOWER ITS
DIVIDEND AS ACCORDING TO COMPANY:-
PEOPLE LOVE DIVIDEND BUT HATE IT WHEN COMPANIES STOP GIVING IT
THE COMPANY HAS BEEN CONSISTENTLY PAYING DIVIDEND SINCE THEN
COMPANY HAS EVEN PERFORMED IN HARD TIMES
COMPANY BACKGROUND
COMPANY HAS ALSO BEEN BUYING SHARES BACK FOR EMPLOYEE STOCK OPTIONS
JANUS CAPITAL IS THE LARGEST SINGLE SHAREHOLDER OF LLTC(EXHIBIT4)
THE COMPANY MAKES ANALOG CIRCUITS WHICH ARE MANUFACTURED IN
FABRICATION FACILITY KNOWN AS ANALOG FAB COSTING (~$200 MILLION)
ANALOG FAB CAN BE USED FOR 10 PLUS YEARS WITHOUT BECOMING OBSOLETE ,
RESEARCH EXPENSES ($102 MILLION)
LINEAR WAS 7TH LARGEST COMPANY BY MARKET CAPITALIZATION IN PHILADELPHIA
STOCK EXCHANGE SEMICONDUCTOR INDEX(SOX)
COMPANY BACKGROUND
LINEARS SALES, GROSS PROFIT AND NET INCOME PEAKED IN FY 2001
BUSINESS SLOWED DONW CONSIDERABLY IN FY2002 AND LINEAR COULD
ONLY EARN $198 MILLION AS COMPARED TO $427 MILLION PREVIOUS YEAR
(EXHIBIT 2)
LTTC HAS A CASH RESERVE OF ROUGHLY $1.5 BILLION OUT OF WHICH SHORT
TERM INVESTMENTS ARE MADE WHICH ARE ONLY YIELDING A TOTAL $52
MILLION WHICH IS JUST 3.4 % .
SOME INVESTORS ARE ASKING COGHLAN TO GIVE SOME SORT OF SPECIAL
DIVIDENDS
PROBLEM DEFINITION

SHOULD LINEAR TECHNOLOGY INCREASE ITS DIVIDEND ,


KEEP IT CONSTANT OR DECREASE IT?
CONCEPTS REQUIRED FOR PROBLEM
SOLVING
DIVIDEND PAYOUT IS NOT MANDATORY
DIVIDEND PAYOUT GIVES A SIGNAL TO THE MARKET THAT COMPANY IS PROFIT
MAKING
PEOPLE START TO LOSE THEIR FAITH FROM FIRMS AT THE TIME OF RECESSION
GORDONS MODEL
BUYBACKS ARE MORE FLEXIBLE THAN DIVIDEND
PEOPLE HATE IT WHEN A DIVIDEND WHICH WAS PAID IS REDUCED OR STOPPED
GORDONS MODEL
ACCORDING TO GORDONS MODEL

(1)
=

P= MARKET PRICE PER SHARE
EPS= EARNING PER SHARE
r= FIRMS RATE OF RETURN
k=FIRMS COST OF CAPITAL OR CAPITALISATION RATE
b=FRACTION OF RETAINED EARNINGS
DIVIDEND= EPS(1-b)
GORDONS MODEL
WHEN , r>k GROWTH FIRM
WE SHOULD LOWER / STOP PAYING DIVIDEND
WHEN , r=k NORMAL FIRM
CAN PAY OR HOLD THE DIVIDEND IT WILL NOT AFFECT OUR PRICE OF SHARE
WHEN , r<k DECLINING FIRM
SHOULD PAY HIGHER DIVIDEND
COMPANYS DATA
DIVIDEND THAT COMPANY IS PAYING PER SHARE = $0.05
STOCK REPURCHASE OF $66.5 MILLION IN Q4 2002
STOCK REPURCHASE OF $125 MILLION IN Q1 2003
STOCK REPURCHASE OF $1.5 MILLION IN Q2 2003
EXHIBIT 1
EXHIBIT 2
BACK
EXHIBIT 3
EXHIBIT 4
EXHIBIT 5
EXHIBIT 6
EXHIBIT 7
EXHIBIT 8
EXHIBIT 9
EXHIBIT 10
SOLUTION AS SOUGHT BY FIRM
LINEAR TECHNOLOGY HAS TAKEN DECESION OF PAYING CONSTANT DIVIDEND OF
$0.05
OPTIONS THAT LLTC HAD

LLTC BEING A FIRM WHICH HAS BEEN MAKING PROFITS IN THE TIME OF RECESSION TOO ,
HAS A STRONG CAPITAL POSITION TOO AS WE CAN SEE FROM EXHIBIT 2 CASH AND SHORT
TERM INVESTMENTS STAND APRROX $1565.2 MILLION
AND ALSO AS WE HAVE EARLIER READ THE RETURN ON INVESTMENTS WERE VERY LOW
PEOPLE LOVE DIVIDENDS, AND BECOMING RISK FREE
PEOPLE LOSE THEIR FAITH IN COMPANYS AT THE TIME OF RECESSION
SO FIRM BASICALLY NEEDED TO :
1. SHAREHOLDERS WEALTH MAXIMISATION
2. MAKE COMPANYS POSITION STRONG IN PEOPLES MIND
3. INCREASE SHARE PRICE
4. DO SOMETHING USEFUL OF STAGNANT CASH
5. BUY BACK SHARES
OPTIONS THAT LLTC HAD
1

THUS WE COME TO 3 ALTERNATIVE DECESIONS


1. CASH FLOW IS USED TO BUY BACK SHARES
2. CASH RESERVE IS USED TO PAY SPECIAL DIVIDENDS
3. IF A PART IS USED FOR BUY BACK AND PART FOR
SPECIAL DIVIDEND

1= ADAPTED FROM A RESEARCH BY Tarun KSG, Saurabh Thadani, Srikanth Konduri, Tushar Gupta ,Nikhil Gupta
1) CASH FLOW IS USED TO BUYBACK
SHARES
NET CASH FLOW IS : $13.2 MILLION
PRICE PER SHARE IS : $30.87
TOTAL SHARES BOUGHT : 13,200,000/30.87=427,600
NEW NUMBER OF SHARES = 312,400,000-427,600=311,972,400
POST BUY BACK EARNING PER SHARE = 170,600,000/311,972,400=$0.5468
EPS BEFORE BUY BACK =$0.546094 = 0.0007
= $, ,
AS THIS REDUCES MARKET CAPITALISATION THIS OPTION CAN BE
NEGLECTED
2) CASH RESERVE IS USED TO GIVE
SPECIAL DIVIDEND
NET CASH RESERVE IS : $1565.2 MILLION
PRICE PER SHARE IS : $30.87
TOTAL SHARES : 312.4 MILLION
LET US ASSUME WE PAY $2.5 PER SHARE AS SPECIAL DIVIDEND
POST DIVIDEND PRICE PER SHARE = 30.87-2.5=$28.37
TOTAL AMOUNT PAID = 2.5X312,400,000=$781 MILLION
EPS BEFORE BUY BACK =$0.546094 =
= $781 MILLIOM
AS THIS REDUCSES MARKET CAPITALISATION THIS OPTION CAN BE NEGLECTED
3) IF A PART IS USED FOR BUY BACK AND
PART FOR SPECIAL DIVIDEND

LET US ASSUME THAT WE USE $500 MILLION EACH TO BUY BACK SHARE AND FOR SPECIAL
DIVIDEND TOO
PRICE PER SHARE IS : $30.87
SO FOR $500 MILLION WE CAN BUY 500,000,000X100/30.87X312,400,000=5.18%
HENCE FOR A PERSON HOLDING 100 SHARES WE WILL BUY BACK 5.18 SHARE AND HE HAS 94.82
SHARES AND BUY BACK YIELDS 5.18X30.87=$159.9066
NOW THE DIVIDEND EVERY SHARE GETS = 500,000,000/296817680=$1.688
HE EARNS IN TOTAL 94.82X1.688=$160.06
PRICE PER SHARE AFTER DIVIDEND =30.87-1.688=$29.182
SHARE PRICE OF SHARES WITH SHARE HOLDER=29.182X94.82=$2767.04
TOTAL CAPITAL VALUE OF SHARE HOLDER=159.9066+160.06+2767.04=$3087
AS SHAREHOLDERS VALUE HAS REMAINED SAME , AND RISK ASSOCIATED WITH LLTC IS REDUCED THIS
WILL BE MOST BENIFICIAL FOR SHAREHOLDERS
BUT THIS WILL ONLY BE GOOD IF THE TAX REFORMS STAY
DECESION COMPANY TOOK ABIDED THE COMPANY POLICY BUT COULD
HAVE BEEN BETTER FINANCIALLY

THEY SHOULD EITHER HAVE REDUCED THE DIVIDEND ( THEORETICALLY)

ELSE THEY SHOULD HAVE PAID SOME AMOUNT FOR SPECIAL DIVIDEND
AND SOME FOR BUY BACK

HENCE WE UNDERSTAND FIRM TOOK A GOOD STEP


BUT IT COULD HAVE BEEN BETTER
REFERENCES
WWW.HERITAGE.ORG
WWW.WIKIPEDIA.COM
WWW.TIMESOFINDIA.COM
TEXTBOOK BY IM PANDEY
RESEARCH PAPER BY CHRISTOPHER TAYLOR
PRESENTATION BY TARUN KSG, SAURABH THADANI, SRIKANTH KONDURI, TUSHAR
GUPTA ,NIKHIL GUPTA
RESEARCH PAPER ON DIVIDENDS AND CORPORATE SHAREHOLDERS BY MICHAEL J.
BARCLAY, CLIFFORD G. HOLDERNESS, DENNIS P. SHEEHAN.