Two technology stocks that have sold off dramatically and deserve consideration for any dividend growth investor's portfolio are Corning (NYSE:GLW) and Texas Instruments (NYSE:TXN). Each company is a leader in many of the markets they participate in. Yet, each company is in different stages of their transformative activities.
TXN has already transformed towards high-margin, high-growth areas in the analog and embedded processing semiconductor markets. GLW, however, has begun its transformation over the past year or so to diversify and expand its smaller divisions to counteract the price sensitivity of its largest division, LCD glass. TXN has established a strong recent history of dividend growth while GLW is embarking on a new dividend growth strategy to reward frustrated investors. Both companies have also engaged in significant share buybacks in recent years to reward shareholders. While we own shares in both companies, we thought it would be interesting to consider which company's shares we would recommend to a long-term investor who could only purchase one company's shares in the near-term.
For GLW, the company has begun to transform itself over the last year or so as its investors have grown frustrated with the company's inability to string together consistent yearly revenue and earnings growth. The company's latest transformative action was its announced divestiture of its Dow Corning joint venture to Dow Chemical (NYSE:DOW). GLW will receive $4.8 billion for such divestiture that will essentially be tax-free. Such divestiture is the latest in a series of steps taken by the company to enhance shareholder value. In addition to the $4.8 billion in Dow Corning proceeds, GLW will retain a 40.25% interest in Hemlock Semiconductor, a leading provider of polycrystalline silicon. In 2015, Hemlock expects to record about $1 billion in sales and $160 million in earnings and contribute about $65 million in gross equity earnings to GLW.
Prior to GLW's divestiture announcement, it announced a capital allocation plan. In particular, through 2019, GLW expects to deploy more than $20 billion by returning greater than $10 billion to shareholders and investing approximately $10 billion in opportunities to grow and sustain its businesses. The company increased its share repurchase authorization and indicated it would grow its dividend by at least 10 percent annually through 2019. The second portion of the capital allocation plan involves the investment of about $10 billion in research and development, capital spending and strategic mergers. The strategic divestiture and Hemlock ownership realignment, approved by the boards of GLW and DOW, is expected to close during the first half of 2016. GLW has not, however, indicated what its intentions are for the $4.8 billion in Dow Corning divestiture proceeds. It is likely, however, that GLW will use such proceeds for a mix of share buybacks and smaller bolt-on acquisitions to strengthen one or more of its divisions.
While investors wait to hear from GLW in regard to its plans to deploy proceeds from its Dow Corning divestiture, we note that the company is facing challenging conditions, as its latest earnings report once again disappointed investors and caused analysts to reduce their earnings estimates for 2016. While the most recent quarterly results for its optical division excelled in comparison to those of its other divisions, adverse currency effects and a weaker global economy depressed the results for the company's remaining divisions (display technologies, specialty materials, environmental technologies and life sciences).
For TXN, the company has transformed into an analog-based company that generates higher margins and cash flow. The analog market is attractive given its relatively steady and profitable business model. Analog companies have thousands of products and a very broad customer base, which leads to a stable revenue stream. Analog markets are also attractive given the lack of commodity products as analog suppliers compete for analog positions on proposed circuit boards. When a company wins a place in a customer's product, the product price remains fixed for the run of the product. As such, analog markets achieve greater price stability than in many digital markets, where commodity-pricing pressures prevail. Analog products usually incorporate proprietary design elements. In addition, analog products usually have longer product life cycles than digital products and are less affected by competition. Analog products also have lower capital requirements for production facilities.
In TXN's latest quarterly earnings report, the company recorded revenue and earnings that exceeded estimates and raised fourth quarter 2015 estimates as well. Revenue for the quarter decreased 2% from the year-ago quarter to $3.43 billion. Earnings per share came in at 76 cents. The company indicated that overall demand for the quarter was weak, but that it recorded more revenue than it had expected. The company also noted that its cash flow from operations support the strength of its business strategy. In particular, TXN stated that cash flow represented 28% of revenue, an increase from 27% a year earlier, and is consistent with its targeted range of 20 to 30% of revenue.
Corning wins in a closely matched comparison
Choosing between these two high quality technology companies is a difficult task given that each of the companies shares trade at depressed levels in the current difficult global business environment. Both companies pay a dividend of about 3%, with TXN having a more established history of dividend growth. Both companies are engaged in substantial share buyback activity. TXN is a company transformed into a more shareholder friendly company while GLW is a company that is transforming towards more consistent revenue and earnings growth that will fuel more shareholder friendly actions.
For TXN, as noted, it has invested its research and development funds in high-margin, high-growth areas in the analog and embedded processing markets. As noted, this strategy allows the company to increase its exposure to the industrial and automotive markets, while decreasing its exposure to volatile consumer and computing markets. TXN, as a primarily analog-based company, generates higher margins, cash flow and returns to shareholders. TXN is well-positioned given its strong balance sheet, its ability to quickly reduce utilization rates to effectively manage inventories, and its benefit from its broader exposure to steadier end-markets such as industrial and automotive markets.
TXN's current price to earnings ratio is about 17.25 and the shares yield about 3.05%. The company's forward price to earnings ratio is 16.15 based on 2016 earnings estimates of $2.97. We should note that earnings estimates have remained relatively steady in recent months. We believe that investors should wait for TXN's share price to pull back to between $43.00 to $46.00 to establish a full position (a forward price to earnings ratio in the range of 14.5 to 15.5). Although we recommend TXN second to GLW, our choice is a very close call as TXN is a very strong choice for investors who wish to invest in a market leading company with strong growth dividend growth, significant share buybacks and a shareholder friendly cash flow return policy.
Despite the near-term pressures that GLW faces, we see the increasingly significant transformative steps the company is taking as benefiting investors over the intermediate and long term. The announced Dow Corning divestiture is the most significant step taken by GLW to date. Although GLW's businesses face adverse foreign currency effects and Chinese economy-related issues, we see the company entering unchartered territory where no analyst or investor can predict the direction the company will take given its capital allocation plan and its unknown use of its Dow Corning proceeds. Further, economic conditions rise and fall, and so too will the conditions in China improve as the Chinese government takes the necessary structural steps to improve economic conditions in that market.
Ultimately, we believe the company's internal innovative research and development program, its ongoing acquisitions to diversify its revenue and profit base, and its increasing dividend and significant share buybacks will reward shareholders. We also believe its strategy to expand and strengthen each of its divisions through new product introductions will drive revenue and earnings growth, and therefore, shareholder returns. We also should note that over the last several years, GLW has more than doubled the number of U.S. patents issued to it, thereby protecting its inventions and preventing competitors from using its patented technology.
GLW's forward price-to-earnings ratio is about 11.65, based on 2016 earnings estimates of $1.45. Choosing between GLW and TXN is a difficult choice. One company, TXN, has transformed. GLW, however, is at the beginning of its transformation. GLW shares are trading at a lower price to earnings ratio than TXN, but our choice of GLW is also based on its almost 3% dividend yield, its transformative actions and the potential boost GLW's shares would receive once the company reveals its plans for using the proceeds of its Dow Corning divestiture and more details about its capital allocation plan emerge. We believe potential investors should initiate a position in GLW's shares now for long-term rewards in the form of dividend increases, share buybacks and share price appreciation. We also believe potential investors should not discount news that in September 2015, a GLW insider purchased the company's shares at $16.67, for a total cost of $597,119. Not a single TXN insider, however, has purchased the company's shares on the open market in recent years.
Disclosure: I am/we are long GLW, TXN, DOW.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.