The M&M theory is used to guide the management of corporates of all sizes: large, medium, and small-scale. The theory proposes that company value should not be affected by its capital structure. It implies that the company’s revenues, profits, and other financial metrics should not be influenced by its value on the stock market. Although the first version of the M&M theory was meant for ideal markets with no asymmetric information, bankruptcy, or taxes, the current version covers all of them.
Linear Technology works in a conventional business environment influenced by regulations, competition, taxes, asymmetric information, and bankruptcy. Currently, Linear Technology is subject to tax obligations like any other commercial enterprise. The current markets are inefficient, indicating that the company does not enjoy tax relief. The company’s financial structure is also not leveraged putting pressure on its financial structure. The company policies state that it should be cautious when signaling to stock strategists about its growth and dividend payment strategy as it could compromise its market value. It implies that the company is facing agency problems that must be resolved. With a clear communication channel between the company management staff and shareholders, It signals the shareholders regularly on its business position.
The Chief Financial Officer’s recommendation that the company begins paying higher dividends is an early decision. The company’s market valuation registered a fast growth between 1994 and 2000. However, the company value plummeted between 2000 and 2002, questioning the validity of the need to increase dividends. Usually, company value is calculated based on future value. With declining share prices, the company value also dropped, and the management should focus on a structured approach to remain competitive in the markets.
Linear Technology’s policies are formulated to fit the needs of all stakeholders: investors, employees, customers, and regulators. The dividends paid by publicly traded companies such as Linear Technology are influenced by revenues, investment plans, and prevailing challenges. As a result, the recommendations by the Chief Financial officer on why the company should increase dividends paid to its shareholders depend on the company’s performance. The company revenue has been declining, implying the net profits have also dropped. In my opinion, Linear Technology has a fair payout policy based on the company’s performance and net profitability. However, the recommendation to increase dividends paid to shareholders comes at a time when the company is on its downfall. I think the company does not have a residual dividend policy at the moment as it has not been mentioned or referenced in its dividends policy.
Initially, the company chose to pay $0.05 per share which accounted for about 15% of the total earnings of the 1994 financial year. According to the Chief Financial Officer, the company chose a maintainable value over time. As a result, the company can only pay dividends to its shareholders as long as it generates profits. Otherwise, the shareholders will be on the losing edge. Since the company decided to pay dividends quarterly in 2000, it has increased to over 25% of total earnings.
Conclusively, the company payout policy is favorable to investors as only a few companies pay a dividend to their shareholders. Starting with low dividend rates ensured the company could maintain paying its shareholders. However, a steady decline in stock prices implies the company might not remain profitable in the future. Consequently, the company might find itself struggling to pay its shareholders. In my opinion, the current dividend payout policy is not efficient. The policy should be defined as only paying dividends when the company makes profits.