Texas Instruments: Great Total Return With Increasing Earnings In A Growing Business Sector

Summary

• Texas Instruments S&P CFRA, three-year forward CAGR of 13%, is good and will give you good growth with the increasing world economy and population.
• Texas Instruments' dividends are above average at 2.5% and have been increased for 14 years in a row.
• Texas Instruments's total return overperformed the DOW average for my 52.0 month test period by 88.91%, which is great.

Texas Instruments (NASDAQ:TXN), one of the largest manufacturer and distributor of semiconductors to electronics designers and manufacturers, is a buy for the dividend growth investor and total return investor. Texas Instruments has steady growth and has plenty of cash, which it uses to buy bolt-on companies, increase the dividend each year, and buy back shares. The stock comprises 5.5% of The Good Business Portfolio, my IRA portfolio of good business companies that are balanced among all styles of investing.

When I scanned the five-year chart, Texas Instruments has a great chart going up and to the right in a steady, strong slope for all of the five years with hardly a bump down. The recent market correction gives you a chance to buy TXN at a discount.

TXN data by YCharts

Fundamentals of Texas Instruments will be reviewed on the following topics below.

• The Good Business Portfolio Guidelines
• Total Return And Yearly Dividend
• Last Quarter's Earnings
• Company Business
• Takeaways
• Recent Portfolio Changes

I use a set of guidelines that I codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies that I am taking a look at. For a complete set of the guidelines, please see my article "The Good Business Portfolio: Update To Guidelines and July 2016 Performance Review". These guidelines provide me with a balanced portfolio of income, defensive, total return, and growing companies that hopefully keeps me ahead of the Dow average.

Good Business Portfolio Guidelines

Texas Instruments passes 11 of 11 Good Business Portfolio Guidelines, a good score (a good score is 10 or 11). These guidelines are only used to filter companies to be considered in the portfolio. Some of the points brought out by the guidelines are shown below.

1. Texas Instruments does meet my dividend guideline of having dividends increase for 7 of the last ten years and having a minimum of 1% yield, with 14 years of increasing dividends and a 2.5% yield. Texas Instruments is, therefore, a good choice for the dividend growth investor. The five-year average payout ratio of dividends is moderate at 50%. After paying the dividend, this leaves cash remaining for investment in expanding the business by buying bolt-on companies, increasing the dividend and buying back shares.
2. I have a capitalization guideline where the capitalization must be greater than $7 Billion. TXN easily passes this guideline. TXN is a large-cap company with a capitalization of $101 Billion. Texas Instruments 2018 projected cash flow at $5.7 Billion is good allowing the company to have the means for company growth and increasing the dividend.
3. I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.3% of the portfolio as income, and I need 1.9% more for a yearly distribution of 5.2%. The three-year forward CAGR of 13% meets my guideline requirement. This good future growth for Texas Instruments can continue its uptrend benefiting from the continued growth of their industrial products in the United States and foreign countries.
4. My total return guideline is that total return must be greater than the Dow's total return over my test period. TXN passes this guideline since the total return is 136.80%, more than the Dow's total return of 47.89%. Looking back five years, $10,000 invested five years ago would now be worth over $33,300 today. This makes Texas Instruments a great investment for the total return investor looking back, that has future growth as the economy continues to grow.
5. One of my guidelines is that the S&P CFRA rating must be three stars or better. TXN's rating is three stars or hold with a target price to $115, passing the guideline. TXN's price is presently 13% below the target. TXN is under the target price at present and has a relatively moderate to low PE ratio of 18, making TXN a fair buy at this entry point.
6. One of my guidelines is, would I buy the whole company if I could. The answer is yes. The total return is great, and an above-average yield makes TXN a good business to own for income and growth long term. The Good Business Portfolio likes to embrace all kinds of investment styles but concentrates on buying businesses that can be understood, makes a fair profit, invests profits back into the business, and also generates a fair income stream. Most of all what makes TXN interesting is the potential long-term demand for its embedded semiconductor products in just about anything that is electronic, especially autos.

Total Return And Yearly Dividend

The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business Portfolio. Texas Instruments beats against the Dow baseline in my 52.0-month test compared to the Dow average. I chose the 52.0-month test period (starting January 1, 2014, and ending to date) because it includes the great year of 2017 and other years that had fair and bad performance. The good total return of 136.80% makes Texas Instruments a great investment for the total return investor that also wants a steadily increasing income. TXN has an above-average dividend yield of 2.5% and has had increases for 14 years, making TXN also a good choice for the dividend growth investor. A dividend declaration will be issued in September 2018 and is estimated to be $0.72/Qtr. up from $0.62/Qtr. or a 16% increase.

DOW's 52.0-month total return baseline is 47.89%

Company name 52-Month total return The difference from DOW baseline Quarterly dividend percentage Texas Instruments 136.80% 88.91% 2.5% Click to enlarge

Click to enlarge

Last Quarter's Earnings

For the last quarter on April 24, 2018, Texas Instruments reported earnings that beat expected by $0.11 at $1.21, compared to last year at $0.97. Total revenue was higher at $3.79 Billion more than a year ago by 11.5% year over year and beat expected revenue by $140 Million. This was a great report with bottom line beating expected and the top line increasing with a good increase compared to last year. The next earnings report will be out July 2018 and is expected to be $1.34 compared to last year at $1.03 a good increase.

Business Overview

Texas Instruments is one of the largest manufacturer and distributor of semiconductors products in the United States and foreign countries.

As per Reuters,

Texas Instruments designs makes and sells semiconductors to electronics designers and manufacturers across the world. The Company operates through two segments: Analog and Embedded Processing. As of December 31, 2016, the Company had design, manufacturing or sales operations in more than 30 countries. The Company's Analog segment's product line includes High Volume Analog & Logic (HVAL), Power Management (Power), High-Performance Analog (HPA) and Silicon Valley Analog (SVA). HVAL products support applications, such as automotive safety devices, touch-screen controllers, low-voltage motor drivers and integrated motor controllers. The Company's Embedded Processing segment's product line includes Processor, Microcontrollers, and Connectivity. Processor products include digital signal processors (DSPs) and applications processors. DSPs perform mathematical computations to process digital data."

Overall, Texas Instruments is a great business with 13% CAGR projected growth as the worldwide economy grows going forward with the increasing demand for TXN's products. The good earnings and revenue growth provides TXN the capability to continue its growth as the business increases by buying bolt companies and foreign expansion.

The graphic below shows the growth of cash flow for Texas Instruments.

Source: TXN February 6 Capital Management slides

The Fed has kept interest rates low for some years, and on March 21, they raised the base rate up 0.25%, which was expected. I believe that they will not raise the rates three more times this year but will go slow at 1-2 for the rest of 2018, which should help keep the economy on a growth path. If infrastructure spending can be increased, this will even increase the United States growth going forward with better economics for the consumer. The recent market volatility may slow down the Fed.

From April 24, 2017, earnings call David Pahl (Vice President, Investor Relations) said,

I'll start with a quick summary of our financial results. Revenue for the first quarter increased 11% from a year ago as demand for our products remained strong in the industrial and automotive markets. In our core businesses, Analog revenue grew 14%, and Embedded Processing revenue grew 15% compared with the same quarter a year ago. Operating margin increased in both businesses. Earnings per share were $1.35, including $0.14 in tax-related benefits not in our original guidance. These were primarily due to the recent tax reform law.

With that backdrop, I'll provide details on our performance, which we believe continues to be representative of the ongoing strength of our business model. In the first quarter, our cash flow from operations was $1.1 billion. We believe that free cash flow growth, especially on a per-share basis, is most important to maximizing shareholder value in the long term. Free cash flow for the trailing 12-month period was $4.9 billion, up 17% from a year ago. Free cash flow margin for the same period was 32.1% of revenue, up from 30.7% a year ago.

We continue to benefit from the quality of our product portfolio that is long-lived and diverse, and the efficiency of our manufacturing strategy, the latter of which includes our growing 300-millimeter Analog output. We believe that free cash flow will be valued if it is productively invested in the business or returned to owners. For the trailing 12-month period, we returned $5.1 billion of cash to owners through a combination of dividends and stock repurchases.

I'll now provide some details by segment. From a year-ago quarter, Analog revenue grew 14% due to Power and Signal Chain. High Volume was about even. Embedded Processing revenue increased by 15% from a year-ago quarter due to growth in both Processors and Connected Microcontrollers. In our Other segment, revenue declined 13% from a year ago primarily due to Custom ASIC products.

Now, I'll provide some insight into this quarter's revenue performance by end market versus a year ago. Industrial demand remained strong with broad-based growth. Automotive demand remained strong, with all sectors contributing to growth. Personal electronics grew, with increases across several sectors and customers. Communications equipment declined but was about even compared with the fourth quarter. And lastly, enterprise systems grew."

This shows the feelings of top management to the continued growth of the Texas Instruments' business and shareholder return with an increase in future growth. TXN has good constant growth and will continue as the world economy grows.

The graphic below shows the R&D allocation by product line that will continue to bring growth to the stockholders.

Source: TXN February 6 Capital Management slides

Takeaways

Texas Instruments is a good investment choice for the dividend growth investor with its above-average dividend yield and a great choice for the total return investor. Texas Instruments is 5.5% of The Good Business Portfolio and will be added to if cash is ever available. If you want a growing dividend income and great total return, in a growing industrial business TXN may be the right investment for you.

Recent Portfolio Changes

I am considering selling the small position in Kraft Heinz Corp. (KHC) that is 0.5% of the portfolio because of its bad performance, and I have better companies for investment. I will see what the earnings are to make the decision.

• On March 29, increased position of American Tower (AMT) to 0.8% of the portfolio. I will continue adding to this position as cash is available.
• On March 29, sold entire position of L Brands (LB). It does not look good for the company going forward.
• On March 26, reduced position of L Brands to 1.5% of the portfolio and will continue to sell off position during the next month.
• On March 23, increased position of Freeport-McMoRan (FCX) to 2.4% of the portfolio and will add to this position as cash is available.
• On March 20, increased position of Freeport-McMoRan to 2.2% of the portfolio and will add to this position as cash is available.
• On March 20 reduced position of L Brands to 1.8% of the portfolio and will continue to sell off position during the next few months.
• On March 16, increased position of Digital Reality Trust (DLR) to 2.4% of the portfolio. I want to get this company to a full position of 4%.
• On March 1, increased position in AMT to 0.9% of the portfolio and will continue to add when cash is available.
• On January 31, trimmed Boeing (BA) from 13.1% of the portfolio to 12.8%. I am greedy and am letting BA be much more a part of the portfolio than reasonable money management should allow. The fourth quarter earnings report was fantastic beating estimates by $0.15 at $3.04 (not including tax gain) and with future estimates all showing good growth for 2018. The decrease in deferred costs for the 787 was $581 Million for 36 planes shipped, which was good.

The Good Business Portfolio trims a position when it gets above 8% of the portfolio. The four top companies in The Good Business Portfolio are Johnson & Johnson (JNJ) is 8.0% of the portfolio, Altria (MO) is 6.8% of the portfolio, Home Depot (HD) is 9.5% of the portfolio, and Boeing is 13.9% of the portfolio, therefore BA, JNJ, and Home Depot are now in trim position, with Altria getting close.

Boeing is going to be pressed to 13% of the portfolio because of it being cash positive on 787 deferred plane costs at $316 Million in the first quarter of 2017, an increase from the fourth quarter. The second quarter saw deferred costs on the 787 go down $530 Million, a big jump from the first quarter. The second quarter earnings were fantastic with Boeing beating the estimate by $0.25 at $2.55. The third quarter earnings were $2.72 beating the expected by $0.06 with revenue increasing 1.7% year over year, another good report. The first quarter earnings for 2018 were unbelievable at $3.64 compared to expected $2.64. I just can't bring myself to sell Boeing.

JNJ will be pressed to 9% of the portfolio because it's so defensive in this post-BREXIT world. Earnings in the last quarter beat on the top and bottom line, and Mr. Market did not like it. JNJ has announced a dividend increase to $0.90/Qtr., which is 56 years in a row of increases. JNJ is not a trading stock but a hold forever; it is now a strong buy as the healthcare sector remains under pressure. Take this recent drop to pick up a great company in the medical products field.

For the total Good Business Portfolio, please see my article on The Good Business Portfolio: 2017 4th Quarter Earnings and Performance Review for the complete portfolio list and performance. Become a real-time follower, and you will get each quarter's performance after this earnings season is over.

I have written individual articles on JNJ, EOS, GE, IR, MO, BA, TXN, PM, LB, Omega Health Investors, Digital Realty Trust, and Automatic Data Processing (ADP) that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest, please look for them on my list of previous articles.

Of course, this is not a recommendation to buy or sell, and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account, and the opinions of the companies are my own.

Analyst’s Disclosure: I am/we are long BA, JNJ, HD, OHI, MO, IR, DLR, GE, PM, LB, PEP, ADP, TXN, KHC. 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.