Executive Summary

Entering the 4th quarter of Linear Technologys fiscal year 2003 the market continues to
show signs of improvement. The company has shown steady growth in the last year and revenues
are estimated to increase 19% over FY 2002. Based on this estimate, FY 2003 net income will hit
$222.7 million ($0.71 earnings per share); a 12.6% growth from the previous year. Operating
cash flow; while lower than 2000 and 2001 has shown a modest increase since 2002 and
continues to be positive due to the companys variable cost structure. This is in-part is due to
more efficient working capital investments and other adjustments to income, awarding the
company a 10% increase in net cash flow year-over-year. Linear Technology has increased its
cash holdings to excess of $1.5 billion through employing cost savings initiatives, though these
holdings have only shown investors modest returns in the neighborhood of 4.25% ($0.10
earnings per share). While modest, investors have come to expect this form of conservativeness
and there has been little outcry of agency issues. Looking ahead, based on an analog fabs life
expectancy of 10 plus years, capital investments, for a new fab, will be required in the next one
or two years in excess of $200 million; leaving more than sufficient cash holdings while
requiring no leveraging. Based on these financials, Linear Technology should look to increase
its dividend payout by $0.01 per share. This has become the expected trend over the last 3 plus
years and any adjustment to this could show signs of weakening in the businesses outlook. This
increase would raise dividend payouts to an estimated $66 million, a 22% increase from the FY
2002. An estimated 8.5% increase in the payout ratio, from 27.31% to estimated 29.64%; ranking
Linear Technology higher than any other company in the SOX for the dividend-to-earnings
payout ratio.

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Potential Issues
Linear Technology is holding on to $1.5 billion in cash and short-term investments which
invests in low risk securities. This can be seen as an agency issue. By Linear Technology holding
onto all this cash and only placing it in short-term debt securities, they are only providing an
internal rate of return of 4.25% ($0.10 per share). See Exhibit 1. Investors may want to see some
of these current assets used to acquire other companies or invested in more R&D that would keep
the internal rate of return above the marginal cost of capital.
The company is faced with the option of keeping the quarterly dividend at $0.05 per
share or increasing the payout to $0.06 per share. If Linear Technology leaves the dividend
payout unchanged, investors could take this move as a sign of weakness. Acknowledging that in
January 2003 institutional holdings of the stock LLTC made up 84.93%; the companys move to
continue to be over-cautious with its current assets and not provide an increase in the dividend
payout may lead the investors to seek greater returns in other securities. By raising the dividend
payout, the company will be faced with a 29.64% payout ratio; the highest in the SOX. See
Exhibit 2. By spending an estimated 66 million on dividend payouts, the company will see a
percentage increase in operating cash flow payout of 26.13%, up from an operating cash flow
payout of 21%. See Exhibit 3.

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Methodology
It is suggested that Linear Technology uses pro-forma statements, value of cash holdings
statements, and dividend payout charts to determine if an increase in dividend payouts will be of
value to the company. Secondly, an overview of the dividend payouts and ratios from previous
years can be used to approximate the clientele effect information effect on investors. Thirdly,
while a comparison of Linear Technology to the market and semiconductor industry will help
determine their position in various categories. Finally, an overview of economists and analysts
outlooks for the coming year in the analog market and semiconductor market can be helpful in
spotting future trends.

Data Requirements for Methodology

Initially Linear Technology will need to create a pro-forma statement for the 4th quarter
based on growth results over the last year. See Exhibit 4. In the exhibit provided, the pro-forma
statement for 2003 was developed based on a 19% increase in sales from the first half of 2003
verse 2002 ($287 million/$241 million = 19%) and adding an estimated growth of 19% to the
second half of FY 2002 figures ($271 million*1.19 = $323 million). The summation of these
figures gives us an estimated sales figure of $610 million ($287 million+$323 million). From this
we can create the pro-forma statements needed to determine net income and cash flows. This
allows the company to estimate dividend payout, dividend earnings, and earnings per share.

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The valuation of cash holdings can be completed by using figures from the balance sheet,
income statement, and current money market rates. See Exhibit 1. Using the valuation of cash
holdings, Linear Technology can see that they are only providing a return of $0.11 on every
$3.56 of investments; a 3.1% return. See Exhibit 4. This formula is used to see how much value
is being added through current asset investments and can be compared with IRR of potential
other projects.
Another tool the company can use is a dividend payout chart that will show the after-tax
percent return to investors dependent on dividend payouts, repurchases and tax rates. See Exhibit
5. Due to the possible overhaul of the tax structure for capital gains and dividends for the 2003
tax year, this chart can be useful in understanding the investors attitude towards the companys
use of cash. By using scenario analysis the company can compare various situations they could
embark upon.
Key Assumptions
This analysis is drawn upon some assumptions made by the author. These assumptions
are as follows: The estimated end-of-year income statement is mostly based on a 19% sales
increase year-over-year; except for other expense based on a 4% increase year-over-year. It is
also assumed that investors are considered Bird in the Hand investors; that they prefer the
certainty of a cash dividend to that of the company placing their investments in uncertainties.
Asymmetry is assumed to be invalid due to the possibility of lower taxes on capital gains and
dividends, hence removing the theory based on investors preferred choice in relation to tax
percentages.

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Analysis
The data shows that an increase of $0.01 in the dividend payout will put Linear
Technology at its highest payout ratio level ever, 29.64%. However, the company will be using
only 26.13% of operating cash flow, up 24.43% from the prior year. In many semiconductor
companies this may be seen as high, but Linear Technology has cash sitting in excess of $1.5
billion and will still be contributing estimates of $48 million to this at the end of FY 2003, even
after $66 million is paid out to investors. If we were to compare the payout ratios to other
technology firms it would suggest that Linear Technology is over paying on its dividend and
should not make an increase. In this case the payout ratio would begin to decline, though
investors would begin to doubt the growth of the company, causing a clientele effect.
It must be mentioned in the analysis that institutional holdings makes up 84.93% of
Linear Technologys stock as of January 2002. See Exhibit 5. This is much higher than the
semiconductor industrys average of 42.09% in 2002. Taking this into consideration, the
company may be able to hear insight from the top institutional holdings to determine their take
on the dividend policy. This was already announced by Blaine Rollins, Portfolio Manager of
Janus Capital, when he made it clear that he was comfortable with the current dividend approach
and ideally liked the strong cash flows and repurchases of stock.

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Finally a look at the expected rate of return compared with the required rate of return for
Linear Technology tells us that by offering an increase in the dividend payout, the expected rate
of return comes in at 24.21%; much higher than the -0.45% required rate of return that the
company would see based on its correlation since the establishment of the SOX. See Exhibit 6.
By illustrating the various situations of dividend payouts, a payout that is based on no increase or
a decrease leaves the investor with a lower expected rate of return of 18.29% and 12.38%,
respectively. Meaning the company would be valued more highly by investors if it was to
increase the dividend.

Conclusion
It is recommended that Linear Technology increases their quarterly dividend up to $0.06
per share, from $0.05 per share. Current increased growth quarter-over-quarter in Linear
Technologys revenues and predicted growth in the world market for 2003 primarily China and
Taiwan provides a solid footing for the future ahead. In times of uncertainty, investors are
looking for companies that continue to show stability. By following the trend of the companys
historic dividend policy, Linear Technology is showing confidence in their outlook going into
Fiscal Year 2004.

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