For those of us of a certain age, the Texas Instruments Inc. (TXN, Financial) brand is synonymous with calculators. But this is not your father’s Texas Instruments; it is now a semiconductor or “chip” company that makes electronic circuits out of transistors.
According to its 10-K for 2019, it has three lines of business:
- Analog: Semiconductors that start with real-world signals, including sound, temperature and pressure. These chips condition or amplify these signals, and often convert them into a stream of digital data. This segment is responsible for 71% of last year’s revenue.
- Embedded Processing: Chips in this segment often become the “brains” of electric equipment, and run everything from electric toothbrushes to advanced driver assistance systems (ADAS). This segment contributed about 20% of last year’s revenue.
- Other: Responsible for about 9% of 2019 revenue, this encompasses a range of products, including calculators.
Customers for Texas Instruments products include:
- Industrial: 36% of revenue.
- Personal electronics: 23% of revenue.
- Automotive: 21% of revenue.
- Communications equipment: 11% of revenue.
When revenue took a dip earlier this year, it was driven mainly by weakness in the automotive sector. The company noted in its second-quarter earnings release, “Analog and Embedded Processing both had positive sequential growth in the second quarter excluding the automotive market.”
Does this diverse product line and diverse set of customers make this a stock of interest for income or value investors? We’ll review its fundamentals as well as its dividend and buyback position to find out.
Financial strength
With a rating of 7 out of 10, the GuruFocus system recognizes Texas Instruments as being in a reasonably strong financial state. To get into more detail, we note from the cash-to-debt ratio that the company is carrying some debt. This 10-year chart shows how it has reduced its short-term debt while growing the long-term debt:
In total, long-term debt at the end of 2019 was $5.56 billion.
Against this liability, it had $5.39 billion in cash, cash equivalents and marketable securities.
Debt is one of the reasons the Piotroski F-Score is below the recommended range of 7 to 9; the GuruFocus system describes it this way: “Compare this year's gearing (long-term debt divided by average total assets) to last year's gearing.” Texas Instruments came up on the wrong side of that test.
Still, it is a company that knows how to generate money. With the funds it gets from shareholders and lenders, it generates a return on invested capital of 44.62%, which is more than six times higher than its weighted average cost of capital at 7.16%.
Profitability
If you’re wondering why its score is high, check the line items and all the green bars beside them.
Check this chart to see how the operating and net margins have fared over the past decade:
Return on equity) and return on assets are both exceptional as well.
The growth rates for revenue, Ebitda and earnings per share without non-recurring items are not as strong as they have been, but all three numbers are positive.
Valuation
The valuation rating is based on these three criteria, as described by GuruFocus:
- “Absolute valuation (medpsvalue) relative to current stock price, rank among all companies."
- “Historical valuation over the past 10 years. Rank pe, ps, pocf, ev2ebit over their own historical values"
- “Industry relative valuation.”
The price-earnings ratio seems reasonable for a tech stock, and as this chart indicates, the ratio has been relatively flat since 2013:
According to the discounted cash flow calculator, the stock is somewhat overpriced:
Dividends
The dividend yield, at 2.67%, is above the S&P 500 average. And while not a rich dividend by any means, there are other factors to consider.
Of course, if you had managed to buy Texas Instruments stock when the share price dipped earlier this year, you might have had a yield of more than 3.0%, even as much as 3.35%:
The payout ratio, the proportion of earnings per share without NRI tagged for dividends, shows at 65%. The company, however, bases its payout on free cash flow; it reported in the second-quarter earnings release that dividends represented 56% of free cash flow, an acceptable proportion.
One of the factors that adds to the yield is the dividend growth rate, an average of 25.1% per year over the past three years.
However, we get different information from the company’s website, where it reported: “In 2019, we raised our quarterly dividend 17%, marking the 16th consecutive year of dividend increases. Over the last five years, we have increased the dividend at a compounded annual growth rate of about 20%.”
Note that the company’s estimate over the past five years is 20%, and that is a compounded annual growth rate, not an absolute growth rate.
In addition, Texas Instruments explained how it can afford such a high growth rate: “As TI began to shift its product portfolio to higher-profit Analog and Embedded Processing products, both of which require less capital spending, the company began to generate more cash flow from operations, and returned that cash to shareholders in the form of increased dividends and share repurchases.”
Another factor that makes the dividend yield of interest is that it increased its dividend payment for the 16th consecutive year in 2019. If it can produce increases for the next nine years, it will become a Dividend Aristocrat, making it more valuable to investors. So, I think it quite likely the company will continue to grow its dividend, but perhaps not at the same rate as the past three years.
The forward dividend yield, at 2.77%, suggests there was an increase recently. In the fourth quarter of 2019, it raised the dividend from $3.21 per share annually to $3.60 per share.
That rapid growth means investors might expect a five-year yield-on-cost or average annual dividend returns of 7.18% per year, assuming investors buy and hold for five years while the company keeps increasing the dividend at the same rate as it did in the past five years.
The other way it can return value to shareholders is with share buybacks. Over the past three years, the buyback ratio has averaged 2.2. As this 10-year chart shows, earnings are being divided among fewer and fewer shares:
Gurus
Texas Instruments is quite popular among the gurus; 23 of them have positions.
By far the biggest position, as of the end of the first quarter, was that of PRIMECAP Management (Trades, Portfolio) with 28,284,818 shares—after a reduction of nearly 11% in the quarter. Al Gore (Trades, Portfolio) of Generation Investment Management was second with 4,765,815 shares and First Eagle Investment (Trades, Portfolio) owned 4,132,486 shares.
Conclusion
Overall, Texas Instruments is a tech company with a robust set of fundamentals and a strong dividend that is quite like to grow rapidly. However, investors will have to shell out more than the intrinsic value to become owners.
Income investors with medium to long-term horizons may think it worthwhile to pay extra to get the promising dividend returns. Still, they should compare it with other stocks to ensure there aren’t other promising dividend stocks that are not as expensive.
Value investors who like the company should put it on their watch lists and wait for the share price to come down, way down. And, of course, a depressed share price could also mean a higher dividend.
Disclosure: I do not own shares in any companies named in this article.
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