TI: Quietly Working Its Chip Magic

Sometimes corporate histories take unexpected turns. Look at Texas Instruments (NASDAQ: TXN). One of the world’s leading semiconductor companies began as an oil and gas operation. TI may have changed its focus and name, but it’s certainly no worse off for that. Today, it’s the number one analog supplier on the planet, boasting more than 44,000 patents to its name.

Still, this isn’t a company you often see in headlines. When talk turns to chips, you usually hear names such as Intel (NASDAQ: INTC) and Qualcomm (NASDAQ: QCOM). In fact, many investors know next to nothing about TI.

Income investors should find particularly attractive its commitment to shareholder returns. In fact, this is a company that aims to return practically ALL of its free cash flow to shareholders through dividends and share buybacks.

However, we need to determine whether our pick for the day offers an attractive buying opportunity. We also have to consider factors that could hold the company back or help it grow. For without growth, there can be no bright future for dividend payments. Why would an income investor even consider such a company?

TI through the years

TI
TI

As mentioned above, TI began as an oil and gas company. It opened for business in 1930 under the name Geophysical Service. In the late 1940s, it shifted its focus to defense system electronics.

We could say TI was truly born in the 1950s. It adopted its current name in 1951. Seven years later, TI engineer Jack Kilby invented the integrated circuit and the company embraced its new future.

TI went public in 1953, choosing to list on the NYSE. However, it transferred to NASDAQ at the start of 2012. The Dallas, Texas-based company currently has a market capitalization of about $81.7 billion.

TI has grown through the years to become an industry major that is part of the Fortune 500 club. It supplies analog integrated circuits and embedded processors, operating in more than 30 countries. With a portfolio comprising almost 100,000 products, TI serves customers in the industrial, consumer electronics, automotive, enterprise systems, and communication equipment industries. It has a global workforce of about 30,000.

Financial performance

TI saw off 2016 with revenues of $13.4 billion. The industrial and automotive markets jointly accounted for 51% of the total. This is important because their growing contribution is helping the company offset the decline in its other segments, particularly personal electronics.

In 2016, TI generated free cash flow of $4.1 billion. The amount has grown at a compound annual rate of 8% since 2004.

The company is due to report its second-quarter results next week. We’ll see if the momentum persists. While we wait, here is a brief overview of how TI fared in the first quarter of 2017.

Revenues in the three months to March 31 rose by 13% year-on-year to $3.4 billion. Net income surged by 40% to $997 million, while earnings per share were 41% higher at $0.97. As the company noted, a discrete tax benefit added $0.08 per share to its earnings.

TI has guided for second-quarter revenues of $3.4 billion to $3.7 billion. It expects earnings per share in the range of $0.89 and $1.01.

The dividend picture

TI began paying dividends in 1962. For many years, the annual distribution remained stuck at $0.085 per share. Following its push into higher-profit analog and embedded processing products, the company started growing its cash flows and stockholders enjoyed the benefits through higher dividends and share repurchases.

The quarterly dividend received a 32% boost in 2016. This ushered in the 13th year in a row of dividend hikes. Shareholders are currently receiving $0.50 per share by way of a quarterly dividend. The yield stands at 2.4%.

We should also note that dividend payments in 2016 took up only 40% of free cash flow. As the company pointed out in its first-quarter report, the low payout ratio will ensure that dividends are sustainable and keep growing.

Why would you want to own TI?

In the broader technology sector, it’s rare to find a stock that won’t keep you up at night worrying. These are usually the companies that have been in business long enough to prove they were not a flash in the tech pan.

One key advantage TI has is its diversified portfolio. When a segment or two experience weakness, TI can fall back on its other divisions. The company is also enjoying steady growth in margins. This is the result of cutting production costs by about 40% thanks to the introduction of a 300mm analog manufacturing process.

If you consult analyst opinions before making a decision, you will like their expectations for TI. Wall Street projects a 7% increase in revenue and an 18% jump in earnings this year. In other words, there’s no reason to believe that TI’s engine will sputter any time soon.

Of course, there’s also the solid track record of annual dividend increases. We must also point out that TI’s yield handily beats the industry median, which is about 1.7%. And how many companies can you think of that want to return all of their free cash flow to stockholders? In addition to dividends, TI has also spent generously on share repurchases. Since 2004, it has reduced its share count by 42%.

Valuation

So, we are obviously dealing with a company that has quite a few attractions for income investors. The question now is whether this stock is attractively priced.

TI is currently trading at $82.16, which is way too close to the 52-week high of $84.65. Compare this to the respective low of $64.74.

The trailing and forward P/E ratios are both about 21. The former is slightly lower than the industry median, while the latter is slightly higher, according to GurFocus. This doesn’t seem much for a strong, highly competitive, and extremely well-managed company. But the current share price feels prohibitive. It appears the best course of action is to keep a very close watch on this stock and spring into action when a correction takes place.

Disclosure:

I do not have a financial interest in any of the companies featured in this article, nor do I plan on having one within the next three days.

This article reflects my opinions. The company is not paying me to write it and I do not have any business relationship with any companies mentioned in it.

 

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