Another Quietly Emerging Dividend Growth Powerhouse Story
Texas Instruments (NASDAQ:TXN) has successfully transformed into a primarily analog based company that will generate higher margins, cash flow and returns to shareholders. The company is investing its research and development budget in multiple high margin, high growth areas of the analog and embedded processing markets. This strategy allows the company to gradually increase their exposure to the industrial and automotive markets, while reducing their exposure to the volatile consumer and computing markets. In TXN's most recent earnings announcement, the company showed that they leveraged continued growth in the automotive, infotainment and other industries to post earnings per share that exceeded Wall Street estimates even though the company's revenue forecast for the current quarter missed expectations.
TXN is well positioned given their healthy balance sheet, their ability to quickly lower utilization rates to effectively manage inventories, and the fact that they will benefit from their broader exposure to steadier end markets such as industrial and automotive markets. In addition, over the last several years, TXN has quietly become a dividend growth powerhouse as their dividend has increased dramatically over that time period. The company recently announced a 13 percent dividend increase to .34 per share, which is an annual dividend of $1.36 a share and a current yield of 2.6 percent. While TXN's shares do not have an extraordinarily high yield, the company's rapid increase of their dividend in the last several years will boost any investor's yield on cost the longer such investment is held. In this article, we will look back at the company's recent short but impressive dividend growth history. That said, we believe that investors interested in establishing a long term position in TXN should wait until the share price drops during an overall market correction before establishing a full position.
BackgroundTXN is one of the largest semiconductor companies in the world based on revenues. The company's semiconductors are used for various tasks including: 1) converting and amplifying signals, 2) interfacing with other devices, 3) managing and distributing power, 4) processing data, 5) canceling noise, 6) and improving signal resolution. TXN's product portfolio includes products that are central to almost all electronics equipment. The company sells custom and standard products. TXN designs and sells custom products for specific applications for specific customers. TXN designs standard products for use by many customers and/or many applications that are typically sold through both distribution and direct channels. Standard products include both proprietary and commodity products.
TXN's product divisions are as follows: 1) analog semiconductors that change real world signals such as sound, temperature, pressure or images by conditioning them, amplifying them, and often converting them to a stream of digital data so other semiconductors can process the signals; 2) embedded processing products that are the "brains" of many electronic devices (embedded processors are designed to handle specific tasks and can be optimized for various combinations of performance, power and cost, depending on the application. Embedded Processing products are used in many markets, particularly industrial and automotive); 3) miscellaneous products including smaller semiconductor product lines and handheld graphing and scientific calculators, Digital Light Processing products primarily used in projectors to create high definition images, and royalties received for patented technology that TXN licenses to other electronics companies.
Third quarter earningsIn October 2014, TXN reported third quarter earnings that increased 29.1 percent from the year ago quarter. The company revenue and earnings were each ahead of expectations and the company's shares rose on the earnings announcement. Revenue for the quarter was slightly ahead of expectations as the company's management indicated that revenue growth in the quarter was equally attributable to the communications equipment industrial and automotive markets. Enterprise systems also grew, but personal electronics continued to be effected by the phase out of its legacy wireless products.
TXN revenue was $3.50 billion, an increase of 7.9 percent from the year ago quarter. The company's analog, embedded processing and other divisions generated 62 percent, 20 percent and 18 percent of quarterly revenue, respectively. The company's analog business increased 11.3 percent from the year ago quarter as power management was the principle reason for growth from the year ago quarter. The company's embedded processing business, which includes the processor, microcontroller and connectivity product lines, increased 6.4 percent from the year ago quarter as the business experienced growth across product lines. The other business division, which includes DLPs, custom ASICs, calculators, royalties and some legacy wireless products, decreased 0.6 percent from the year ago quarter.
Net income excluding restructuring gains and acquisition charges (that will remain steady over the next five years), was $900 million. On a GAAP basis, TXN reported a net profit of $826 million, or 76 cents a share compared to a net profit of $629 million (57 cents per share) in the year ago quarter. Earnings per share for the quarter is expected to be 64 to 74 cents.
The advantages of the analog marketThe analog market is attractive due to 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 because they are not commodity products. The market is segmented, as there are many designs available and many analog suppliers compete for the analog positions on proposed circuit boards. When a company wins a place in a customer's product, however, 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 from Asian competitors. Analog products women's asics gel black running shoes also have lower capital requirements for production facilities.
TXN is establishing a strong dividend growth historyFrom about late 1995 until late 2006, the dividend about doubled from about .02 a share per Asics Shoes For Men quarter to .04 per quarter in 2006. From 2006, to the present day, TXN has established an impressive dividend growth rate that appears to show no signs of stopping given the company's intention of returning to shareholders all free cash flow not needed for debt repayment (for either share buybacks or dividend increases). As TXN's turnaround towards the analog market took hold, began their impressive streak of dividend increases.
From .04 a quarter in 2006, the company then raised their dividend to .08 per quarter in early 2007, .10 per quarter in late 2007, .11 per quarter in 2008. .12 per quarter in 2009, .13 per quarter in 2010, .17 per quarter in 2011, .21 per quarter in late 2012, .28 per quarter in early 2013, .30 per quarter in late 2013 and .34 per quarter in 2014. In a period of just eight short years since the company began to raise their dividend on at least a yearly basis, TXN's dividend has increased by more than 800% in that period of time. Despite the rapid increase in the company's dividend, analysts and financial news media appear to ignore it. We believe that individual investors should not ignore such dividend growth and place the company's shares on their watch list for not only share price appreciation, but also dividend growth.
Analysts' views and our viewsAnalysts believe that TXN is sensibly investing their research and development budget in multiple high margin, high growth areas of the analog and embedded processing markets. This decision by TXN allows the company to slowly increase their exposure to the industrial and automotive markets, while reducing exposure to the volatile consumer/computing markets. TXN, as a primarily analog based company, will generate higher margins, cash flow and returns to shareholders. The company also intends to use free cash flow for share repurchases and higher dividends.
TXN's current price to earnings ratio is about 23.2 and the shares yield 2.6 percent. In addition, the company has a recent history of substantially raising dividends in addition to the company's substantial share buyback activity. TXN's forward price to earnings ratio is 18.25 based on 2015 earnings estimates of $2.88. We should note that TXN has seen recent upward earnings estimate revisions, suggesting that analysts are more confident in the women's asics gel black running shoes company's short and long term prospects. That said, men's asics running shoes black red with overall markets at or near record highs, an investor should wait for TXN's share price to pull back to between $43.20 to $46.10 to establish a full position (a forward price to earnings ratio in the range of 15 to 16). Investors should note, however, that as we discussed above, TXN has become a stealth growth dividend stock that all dividend growth investors should strongly consider. Even if potential investors do not time their investment in TXN shares perfectly, they can enjoy strong dividend growth. Currently, prospective TXN shareholders should patiently wait for their opportunity to establish a full position in the company's shares. Finally, we should note that TXN's shares have seen extensive insider selling with no purchases in recent years.