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Company Analysis

3629 words - 15 pages

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University of the West Indies,
Cave Hill campus

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DEPARTMENT OF MANAGEMENT STUDIES
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COURSE NAME: CORPORATE TAX PLANNING
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COURSE CODE: ACCT 6014
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SEMESTER TWO
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Linear set its quarterly dividend at a low introductory price of $0.05 per share which accounted for $8.3 million, or 15% of FY 1994 earnings. The company’s strategy was to be very conservative with its cash management so that a situation did not arise where it was unable to pay dividends. However, Linear’s payout policy was far greater than the other firms in the sector. In addition, its dividend yield also exceeded that of many of the other companies in the industry. Coghan explains that investors respect companies for paying dividends, but hammer those firms that reduce or stop paying dividends. The company wanted to strategically remain realistic about what payout ratio it could sustain over time.
Linear consistently paid a dividend which increased at a steady rate over the years. Starting at $0.00625 in Q2 of 1993, its dividend steadily increased to $0.05 in Q3 of 2003 for an average increase of $0.0181 per year. Linear had a dividend yield of 0.37% and an average payout ratio of 13% over the last decade. Amidst the drop in sales and earnings in 2002, management and the board debated whether or not to increase the dividend rate. Coghan argued for an increase as he felt that it would validate Linear’s ability to be profitable and keep cash flow positive even in tough times. In 2002 Linear had a payout ratio of 26.98%. This caused Linear’s payout ratio to move into the 25% to 30% bracket. Management was aware of this but remained confident about the business prospect and cost structure. Furthermore, it was of the opinion that investors placed the company in a high category because of its consistent dividend. Hence it did not want to lose that position. In a low interest rate environment, Linear was able to provide its investors with a dividend yield of 1%. This helped to boost investors’ confidence in the company as many of them looked to the company as a source of income with potential growth possibility.
Linear also used share repurchase as another method of returning cash to shareholders. Management was of the view that the positive cash flow of the company would allow them to return some of the cash to shareholders in the form of a share repurchase. Therefore in some years Linear allocated more cash to share buybacks than to dividends. This strategy was driven by two factors:
* the first was to offset the exercise of employee stock options which was given as a form of compensation
* the second was based on market conditions. For example, when interest rates were low and the securities were not earning much interest, Coghan thought it best to use the cash to buy back
shares.
In 2002, Linear ended up with cash and short term securities totalling over $1.5 billion but interest from investment was only $52 million which equated to a 3% yield. In addition, Linear had no plans for making an acquisition since it was a very conservative company which did not want to sacrifice it’s margins for top of the line sale growth. As...

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