When I first bought stock in Texas Instruments (TXN) in 2007, I viewed the company as a fairly conservative growth play in the semiconductor industry, with a cash-rich balance sheet and a healthy dividend. Over the past few years, my investing thesis has slowly been invalidated as Texas Instruments' focus continues to shift. This style shift is further exemplified by the decision Thursday to raise the dividend by 31% to 17 cents a quarter.
Stymied by a weak semiconductor sector, particularly for anyone not aboard the Apple (AAPL) supplier gravy train, Texas Instruments has struggled to keep any sort of top-line revenue growth going. Revenues have surpassed pre-great financial crisis levels, but revenue growth has already stalled out again in 2011. The company took a bold step to combat a stagnant top line with the controversial buyout of National Semiconductor (NSM), which should close later this year.
The NSM buyout invalidates the argument that Texas Instruments has a clean balance sheet with several billion dollars in net cash. By spending around $6.5 billion in its all-cash deal for National Semi, Texas Instruments will find itself facing a moderate debt load. The company's substantial free cash flow generation (TXN produced $1.9B levered free cash flow last year, and NSM produced an additional $155M) will give Texas Instruments the ability to repay this debt quickly if it wishes.
The bigger question for investors is whether the combined Texas Instruments/National Semiconductor will be able to generate much organic revenue growth into the future. The company is a dominant player in the analog semiconductor space, and its 11 trailing and forward P/Es indicate that if revenue growth stalls, the company is probably fairly valued.
If there is little growth forthcoming, one must wonder if there are better places to park money within the tech space. There are a bunch of dominant tech titans with stagnant top lines, such as Intel (INTC), and Cisco (CSCO), that kick out nice dividends. By paying for growth through mergers rather than creating it organically, and by hiking the dividend an aggressive 31%, it appears Texas Instruments is joining the club of dominant, stodgy tech titans with low forward valuations and whose value is more dependent on yield than on capital gains fueled by revenue growth.
These sorts of stocks can be perfect for retirees and other investors looking for income from their investments. With bond yields at near-record lows, it is hard to argue with buying Texas Instruments as the dividend alone has a higher yield than government bonds today. And it is hard to envision Texas Instruments trading much lower for a sustained period over the next decade.
On the other hand, it is getting increasingly hard to see much upside, either. Texas Instruments was a $30 stock in 2002, 2004, 2006, and now it is again -- it has not produced meaningful capital appreciation for an entire decade. If the company cannot meaningfully grow revenue internally in coming years, it will quickly head toward the widows, retirees, and orphans camp of investment products.
Still, I am not giving up on Texas Instruments yet. Even though my original reasons for buying the stock no longer apply, I like the management team and think they did a good job of leading the company back after the great recession. But I am losing a little patience with them. I bought the company for organic growth and a clean balance sheet. I am not interested in them paying large premiums to acquire other fairly stagnant businesses like National Semiconductor, nor am I interested in an enhanced dividend. I am willing to hold on to the stock a little longer to see a quarter or two of post-merger results. But I am not particularly pleased with the road the company is traveling down.