Texas Instruments' Routine Excellence

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About: Texas Instruments Incorporated (TXN)
by: Dividend Sleuth
Summary

No glitz and glitter; just the "nuts and bolts" of technology.

Texas Instruments has a profitable Automotive and Industrial technology niche.

A single-minded focus on growing and returning cash flow per share.

The company should continue steady growth in the cyclical semiconductor industry.

Texas Instruments has engineered a place in our 5G, Internet of Things future.

Texas Instruments Incorporated (TXN) is a core technology position, because without glitz or glitter, TI has found a profitable technology niche in automative and industrial applications.

The company has a simple focus to grow free cash flow per share. This enables it to steadily grow in the cyclical semiconductor industry. TI's "nuts and bolts" are highly engineered, technologically advanced, high-capacity silicon wafers and other devices.

TI is well positioned to continue to lead in analog semiconductors and embedded processors as 5G technology expands the Internet of Things (IoT).

Two segments: Analog and Embedded

Analog semiconductors amplify and convert signals, such as sound, temperature or pressure, into digital data. Major markets are industrial, automotive and personal electronics.

Embedded processors are the "brains" of many types of electronic equipment, from electric toothbrushes to automotive infotainment systems and advanced driver assistance systems. Major markets are industrial and automotive.

The 2018 10-K reported revenue of $15.78 billion, with $10.80 billion (68%) from Analog and $3.55 billion (23%) from Embedded Processing. Other 2018 revenue was $1.43 billion, including high-definition projectors, calculators and integrated circuits.

2018 operating profit was $6.71 billion, with Analog contributing $5.11 billion, Embedded Processing $1.21 billion and $399 million from Other.

A global semiconductor leader

TI began in 1930 as an oil & gas company. During World War II, the company applied signal processing technologies to submarine detection and radar. Renamed Texas Instruments in 1951, TI invented the silicon transistor in 1954, the integrated circuit in 1958 and an electronic hand-held calculator in 1967. TI components were in the Apollo Lunar Exploration Module.

Significant advancements include:

Many products but a clear, simple focus

TI is in more than 30 countries, offering 100,000 customers nearly 100,000 products. It has nearly 40,000 patents and annually introduces 300-400 new products. The company has maintained an interest in sustainability and environmental stewardship.

TI's webcasts and transcripts reiterate that the business operates in the most profitable segments in the most promising sectors for long-term growth of free cash flow per share.

Capital allocation decisions about personnel, research & development, factory expansion, mergers, acquisitions, dividends and share buybacks are driven by what will enable the company to grow free cash flow per share.

Visitors to the TI website are greeted by Chief Executive Officer Rich Templeton:

"The ultimate measure for any enterprise is superior long-term growth of free cash flow."

Free Cash Flow Graphic

(Texas Instruments website)

Dave Pahl, Head of Investor Relations, and Chief Financial Officer Rafael Lizardi handled quarterly calls and the annual capital strategy webcast on February 5, 2019. Some key points:

  • "We are focused on the best products and in the best markets in the semiconductor industry. We believe analog and embedded are the best products."
  • "We believe industrial and automotive are the best markets ... the fastest growing due to their increasing semiconductor content ... products becoming more intelligent, more connected, safer, more efficient, ... as mechanical and electromechanical features are replaced with solid-state electronics."
  • "... we will have three drivers contributing to free cash flow per share growth: top line revenue growth, free cash flow margin expansion and share count reduction."
  • "We have now raised the dividend for 15 consecutive years, including a 24% increase in 4Q '18. We have increased the dividend at a compounded annual growth rate of 21% over the last five years."
  • "We have reduced shares outstanding by 45% since 2004, including the 3.9% reduction in 2018."
  • "We remain committed to returning all free cash flow to the owners of the company."

Steady growth in a cyclical industry

For the 12 months ending March 31, 2019, TI generated free cash of $6 billion, up 22% from the prior year. Free cash flow margin was 38.4% of revenue, up from 32.1%. In the Q1 2019 earnings call, Dave Pahl said, "We continue to benefit from the quality of our product portfolio that's long-lived and diverse, and the efficiency of our manufacturing strategy, the latter of which includes our growing 300-millimeter Analog output."

Several years ago, TI invested in a new factory designed to build 300-millimeter silicon chips. Another 300-millimeter factory will be built in Richardson, Texas. At the capital allocation presentation, Pahl said:

"A chip ... made on a 300-millimeter wafer costs about 40% less than a chip built on a 200-millimeter wafer ... used by most of our competitors. ... we get about 2.3x more chip, but it doesn't cost 2.3x to process that larger wafer. This translates into a structural cost advantage."

The semiconductor business is in the third quarter of a cyclical downturn. Operating profit was down 11% from the year-ago quarter. Operating margin was 43.2% for Analog, down from 45.4%; and 31.3% for Embedded Processing, down from 35.4%.

CFO Rafael Lizardi discussed this cycle in the Q1 2019 earnings call:

"After 10 quarters of year-on-year growth, the weakness we are seeing is primarily due to the semiconductor cycle. We have just completed our second quarter of year-on-year declines... cycles are always different, but typically, the industry would have 4 to 5 quarters of year-on-year declines before year-on-year growth resumes. We are not trying to forecast the cycle, but simply offer some historical perspective."

In response to a question about buybacks versus dividends, Lizardi connected the business cycle with TI's goal of increasing free cash flow:

"... Our objective is to return all free cash flow to the owners of the company via buybacks and dividends. And... sometimes you strategically build cash, sometimes you strategically drain cash... So then (at times) you can actually return more than 100% of free cash flow... On... buybacks and dividends, the goal is to provide a sustainable and growing dividend (that we) target to be somewhere between 40% to 60% of free cash flow... And then on the repurchases, it's the accretive capture of future free cash flow for the long-term owners."

Engineering a place in our 5G, Internet of Things future

TI sees Analog growth opportunity enhanced by products for 5G, such as macro base stations. The company's communications equipment business grew in Q1 2019 about 30% year on year, benefiting in part from 5G shipments.

Its Analog and Embedded segments represent more than 90% of revenue, with a compound average growth rate of 8%. Market share gains have averaged 30-40 basis points annually for the past 15 years.

TI semiconductors and related solid state products will be inside automobile dashboards, sensors and timers that control the environment of homes and businesses, and components that facilitate interactive communication between traffic signals and automobiles. TI will provide much of the "brains" for IoT - the Connected Everything.

Financial Performance

Here's a snapshot of selected data from Finviz.

  • Trailing 12-month Earnings Per Share: $5.51
  • Trailing 12-month Price/Earnings ratio: 20.18
  • Projected 2019 EPS: $5.77
  • Forward P/E ratio: 19.27
  • Estimated earnings growth for the next 5 years: 8.04%
  • PEG ratio: 2.51
  • Beta: 1.23
  • Book Value: $9.07

F.A.S.T. Graphs

TXN's share price growth has outpaced EPS growth. The market has awarded the company a premium valuation since the fall of 2012. F.A.S.T. Graphs projects a slight EPS dip in 2019, then 10% growth in 2020 and in 2021.

Texas Instruments' Standard & Poor's credit rating is A+.

Debt is indicated at 35% of capitalization. I monitor two measures of debt: by market capitalization and by book value. TI's debt of $5.8 billion is 5.0% of $110.2 billion capitalization measured by debt plus equity market value of $104.4 billion. The company's debt is 40.0% of $14.7 billion capitalization measured by debt plus book value of $8.87 billion. I find the market cap comparison more useful.

TXN F.A.S.T. Graph

(Graph from F.A.S.T. Graphs)

Dividend

Justin Law's compilation of Dividend Champions (25+ consecutive years of dividend increases), Contenders (10+ years) and Challengers (5+ years) includes TI among the Dividend Contenders at 15 consecutive years of dividend increases, beginning in 2004. The list is maintained by The DRiP Investing Resource Center, which shows a 5-year dividend growth rate of 19.7%. The most recent increase was 24.19%.

I've been long TXN since January, 2016, when three buys averaged $50.10. The quarterly dividend was $.38, for $1.52 annually. The yield was 3.03%. At the $111.17 closing price on Friday, June 7, 2019, and a quarterly dividend of $.77, or $3.08 annually, TXN's yield was 2.77%. The dividend more than doubled in 3.5 years, but the market price rose more. The stock represents 3.11% of the market value of my retirement income portfolio.

TXN's high yield for the past 5 years has ranged from 2.9% to 3.5%. The average high yield has been 3.1%.

Simply Safe Dividends gives TXN a very safe dividend safety rating of 93, with 50 being average.

Valuation

With a 52-week price range of $87.70 to $119.32, the mid-point is $103.51. The low occurred on December 26, 2018, when the 3.5% yield matched the 5-year high yield.

I use a tool called The Stock Selection Guide that was developed in the 1950s by the (then) National Association of Investment Clubs (now Better Investing). Its purpose is to establish a possible 5-year price range using selected data from the past 10 years, modified by one's judgment about factors that may enhance or impede growth.

Estimated high price. I chose a potential high EPS of $8.21, using Finviz's estimated 8.0% EPS growth. I chose a potential high Price/Earnings ratio of 23.1 (the average high P/E for the previous 5 years). $8.21 x 23.1 indicates a possible high price of $189.70.

Estimated low price. I selected $80.00 as a possible low price by averaging the 52-week low of $87.70 and the January 6, 2017 low of $72.50.

Price range. A possible 5-year price range of $80.00-189.70 represents a swing of about $109.70. The lower 1/4th is a "Buy" range, the upper 1/4th is a "Sell" range and the middle 1/2 of the possible price swing is a "Hold" range.

Buy and Sell ranges. The "Buy" range is $80.00-107.40. The "Sell" range is $162.30-189.70.

Texas Instruments is a Hold for me at $111.17. Currently, TXN is my 9th largest holding at 3.11% of the portfolio. Given this sizable position, my target Buy price is $96.25, a 3.2% yield at the current $3.08 dividend. I use Custom Stock Alerts to notify me when a stock nears my target.

TXN Stock Selection Guide P. 1 TXN Stock Selection Guide P. 2

(Author's calculations using BetterInvesting.org's Stock Selection Guide)

Conclusion

Texas Instruments is a core technology holding, along with Cisco (CSCO) and Qualcomm (QCOM). I appreciate TI's focus to grow and return free cash flow to shareholders through dividends and buybacks. TI's semiconductors and related products will be increasingly important in our more digitized, technologically more intelligent and more inter-connected world.

If you're a TXN shareholder or considering TXN shares, I encourage you to access webcasts of management presentations at TI.com.

I'm not advocating the purchase or sale of any security. My articles offer ideas for stocks to study and form a journal of my effort to design and maintain a retirement income portfolio with a relatively safe stream of growing dividends. I seek companies with histories of rising dividends, strong financials and solid future prospects. Your goals and risk tolerance may differ, so please do your own due diligence.

Disclosure: I am/we are long TXN, CSCO, QCOM. 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.

Additional disclosure: This article was written by Ted Leach (Dividend Sleuth) with input from Kirk Spano and David Zanoni. The article is for informational purposes only (not a solicitation to buy or sell stocks). Ted is not a registered investment adviser. Investors should do their own research or consult a financial adviser to determine what investments are appropriate for their individual situation. This article expresses my opinions and I cannot guarantee that the information/results will be accurate. Investing in stocks involves risk and could result in losses.