Texas Instruments: Great Total Return With Last Dividend Increase Of 24%
Long only, dividend growth investing, growth at reasonable price, Total Return
Texas Instruments total return over-performed the DOW average for my 48-month test period by 68.05%, which is great.
Texas Instruments dividends are above average at 3.1% and have been increased for 15 years in a row with the last increase of 24% in September 2018.
Texas Instruments S&P CFRA, three-year forward CAGR of 8%, is good and will give you good growth with the increasing world economy and population.
Texas Instruments (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 5.3% 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 2015-2017 with 2018 showing a loss in a losing market.
Fundamentals of Texas Instruments will be reviewed on the following topics below.
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 considering for the portfolio. For a complete set of the guidelines, please see my articleThe Good Business Portfolio: Update to Guidelines, August 2018. 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.
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.
Texas Instruments does meet my dividend guideline of having dividends increase for 8 of the last ten years and having a minimum of 1% yield, with 15 years of increasing dividends and a 3.1% 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. It is managements intention to return all the cash flow to the stockholders via dividends and stock buybacks.
I have a capitalization guideline where the capitalization must be greater than $10 Billion. TXN easily passes this guideline. TXN is a large-cap company with a capitalization of $94 Billion. Texas Instruments 2018 projected cash flow at $6 Billion is good allowing the company to have the means for company growth and increasing the dividend.
I also require the CAGR going forward to be able to cover my yearly expenses and my RMD with a CAGR of 7%. My dividends provide 3.3% of the portfolio as income, and I need 1.9% more for a yearly distribution of 5.2% plus an inflation cushion of 1.8%. The three-year forward CAGR of 8% 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.
My total return guideline is that total return must be greater than the Dows total return over my test period. TXN passes this guideline since the total return is 101.76%, more than the Dows total return of 33.71%. Looking back five years, $10,000 invested five years ago would now be worth over $24,400 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.
One of my guidelines is that the S&P CFRA rating must be three stars or better. TXNs rating is three stars or holds with a target price to $103, passing the guideline. TXNs price is presently 9.5% below the target. TXN is under the target price at present and has a moderate PE ratio of 17, making TXN a good buy at this entry point. This is an opportunity to buy a growing income stream at a good entry price.
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.
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 48-month test compared to the Dow average. I chose the 48-month test period (starting January 1, 2015, 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 101.76% 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 3.1% and has had increases for 15 years, making TXN also is a good choice for the dividend growth investor. The dividend was last updated September 2018 and was increased to $0.77/Qtr. up from $0.62/Qtr. or a 24% increase.
DOWs 48.0 Month total return baseline is 33.71%
For the last quarter on October 23, 2018, Texas Instruments reported earnings that beat expected by $0.05 at $1.58 compared to last year at $1.26. Total revenue was higher at $4.26 Billion more than a year ago by 3.6% year over year and missed expected revenue by $40 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 January 2019 and is expected to be $1.28 compared to last year at $0.34 a good increase.
Texas Instruments is one of the largest manufacturer and distributor of semiconductors products in the United States and foreign countries.
Texas Instruments designs, make 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 Companys Analog segments 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 Companys Embedded Processing segments 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 8% CAGR projected growth as the worldwide economy grows going forward with the increasing demand for TXNs products. The good earnings and revenue growth provides TXN the capability to continue its growth as the business increases by buying bolt-on companies and foreign expansion.
The graphic below shows the growth of cash flow for Texas Instruments.
Source: TXN web siteFebruary 6, 2018, Capital Management slides presentation
The FED has kept interest rates low for some years, and on December 19, 2018, they raised the base rate 0.25%, which was expected. I believe that they will go slow in 2019, 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 FED lowered GDP projection for next year which may mean they are getting to neutral on the economy, projecting two rate increases for 2019. The recent volatility may keep the FED on hold. Recently the FED Chairman made a statement which was dovish, and the market went up strongly.
From October 23, 2018,earnings callDavid Pahl (Vice President, Investor Relations) said:
Ill start with a quick summary of our financial results. Revenue for the third quarter increased 4% from a year ago; however, demand for our products slowed across most markets during the
quarter. Earnings per share were $1.58. In our core businesses, Analog revenue grew 8%, and Embedded Processing revenue declined 4% compared with the same quarter a year ago.
Analog and Embedded performed about the same directionally within most end markets, with communications equipment as the exception. In communications equipment, Analog products saw double-digit growth, which included early 5G product ramps, while Embedded products declined from a year ago, as we expected. Without the decline in communications equipment, Embedded would have grown.
With that backdrop, Ill provide details on our performance, which we believe continues to be representative of the ongoing strength of our business model. In the third quarter, our cash flow from operations was $2.1 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 $5.9 billion, up 40% from a year ago. Free cash flow margin for the same period was 37.5% of revenue. We continue to benefit from the quality of our product portfolio thats 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 only be valued if it is productively invested in the business or returned to owners.
For the trailing 12-month period, we returned $6.2 billion of cash to owners through a combination of dividends and stock repurchases. In September, we announced we would increase our dividend by 24%, and we increased our share repurchase authorizations by $12 billion, taken together these reflect our commitment to return all of our free cash flow to our owners.
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 slowly.
The quote below gives details for the R&D capital spending and the cash flow.
From October 23, 2018,earnings callRafael Lizardi (Chief Financial Officer) said:
Gross profit in the quarter was $2.8 billion or 65.8% of revenue. From a year ago, gross profit increased primarily due to higher revenue. Gross profit margin increased 130 basis points. Operating expenses in the quarter were $786 million, about even from a year ago and about as expected.
On a trailing 12-month basis, operating expenses were 20.4% of revenue, within our range of expectations. Over the last 12 months, we have invested $1.55 billion in R&D. We are pleased with our disciplined process of allocating capital to R&D that allows us to continue to grow our top line and gain market share.
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 5.3% 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.
I intend to watch the earnings reports for the companies in the portfolio and may finally decide to trim my high flyers that are over 8% of the portfolio so I can invest in good companies on my buy list.
On January 11, started a new position in Lockheed (LMT) at 0.65% of the portfolio.
On January 9, trimmed Mondelez (MDLZ) from 1.32% of the portfolio to 0.64%. The growth rate looks low going forward, and the portfolio is looking at Lockheed as a replacement.
On November 19, the portfolio trimmed 3M from 1.4% of the portfolio to 0.92%. The last earnings report was fair but and the next year does show the growth that is wanted. I was going to sell this small position, but the recent market volatility makes me want to hold this defensive income position.
On October 10, trimmed Home Depot (HD) from 10.1% of the portfolio to 9.6%. I love HD but dont want it to get above 10% of the portfolio.
On October 10, the portfolio added starter position of VISA (V) at 0.4% of the portfolio.
On August 22, increased the percentage of DLR to 3.3% of the portfolio, I want to get this REIT to a full position of 4%.
On August 15, sold all remaining AmerisourceBergen(ABC) in the portfolio.
On August 9, the portfolio reduced AmerisourceBergen to 0.4% of the portfolio. I will most likely sell the remainder of ABC next week. The company margin is very thin, and I dont like the present pressure of the opioid crisis. The risk has gotten too high versus the reward.
On July 12, bought a small starter position (0.1% of the portfolio) in Simulation Plus (SLP) a small software company that helps test/simulate new drugs before they are released. SLP is a very speculative investment and should be watched carefully.
On June 20th, closed out covered calls and sold KHC position, I needed some cash. I got a better price using the calls but missed some of the recent gains.
On June 8, sold KHC July 57.5 calls against the position and will make 4% if the KHC price remains the same. The calls are now in the money, and I may move them up and out when the time value is small.
The Good Business Portfolio trims a position when it gets above 8% of the portfolio. The four top companies in the portfolio are, Johnson & Johnson (JNJ) is 8.8% of the portfolio, Omega Health Investors is 8.7% of the portfolio, Home Depot is 8.9% of the portfolio and Boeing is 13.2% of the portfolio. Therefore BA, OHI, JNJ, and Home Depot are now in trim position, but I am letting them run a bit since they are great companies.
Boeing is going to be pressed to 14% 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 of 2017 earnings was fantastic with Boeing beating the estimate by $0.25 at $2.55. The third quarter of 2017 earnings were $2.72 beating the expected by$0.06 with revenue increasing 1.7% over last year, another good report. The first quarter earnings for 2018 were unbelievable at $3.64 compared too expected at $2.64. Farnborough Air Show sales in dollar value just beat out Air-Bus by about $6 Billion, and both companies had a great number of orders. The second quarter earnings beat expectations by $0.06 at $3.33, but a good report was hurt by a write off expense on the KC-46 which should start delivery in 2019. Boeing received an order for 18 more KC-46A planes. As a result of the good third-quarter earnings, S&P CFRA raised the one-year price target to $ 450 for a possible 37% upside potential.
JNJ will be pressed to 9% of the portfolio because its so defensive in this post-BREXIT world. Earnings in the last quarter beat on the top and bottom line and Mr. Market did 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.
For the total Good Business Portfolio, please see my article onThe Good Business Portfolio: 2018 3rd Quarter Earnings and Performance Reviewfor the complete portfolio list and performance. Become a real-time follower, and you will get each quarters performance after this earnings season is over.
I have written individual articles on JNJ, EOS, GE, IR, MO, BA, TXN, PM, MO, Omega Health Investors, Digital Realty Trust (DLR) 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.
Disclosure:I am/we are long BA, JNJ, HD, OHI, MO, IR, DLR, GE, PM, PEP, ADP, TXN, EOS, FCX, LMT.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.