Company Description: Texas Instruments Inc. is of the world's largest manufacturers of semiconductors, this company also produces scientific calculator products and DLP products for TVs and video projectors.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
TXN is trading at a premium to all four valuations above. However, when considering the NPV MMA Differential Fair Value, the stock is trading at a 14.0% discount to its calculated fair value of $64.63. TXN earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
TXN earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. TXN earned a Star for having an acceptable score in at least two of the four Key Metrics measured.
Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2004-2007, 2005-2008, 2006-2009, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1962 and has increased its dividend payments for 12 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
TXN earned a Star in this section for its NPV MMA Diff. of the $4,851. This amount is in excess of the $2,300 target I look for in a stock that has increased dividends as long as TXN has. If TXN grows its dividend at 15.0% per year, it will take 2 years to equal a MMA yielding an estimated 20-year average rate of 2.98%. TXN earned a check for the Key Metric 'Years to >MMA' since its 2 years is less than the 5 year target.
Memberships and Peers: TXN is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. The company's peer group includes: Analog Devices, Inc. (ADI) with a 2.6% yield, QUALCOMM Incorporated (QCOM) with a 2.3% yield and Linear Technology Corporation (LLTC) with a 2.3% yield.
Conclusion: TXN earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks TXN as a 5-Star Very Strong stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $75.23 before TXN's NPV MMA Differential decreased to the $2,300 minimum that I look for in a stock with 12 years of consecutive dividend increases. At that price the stock would yield 1.8%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,300 NPV MMA Differential, the calculated rate is 12.3%. This dividend growth rate is lower than the 15.0% used in this analysis, thus providing a margin of safety. TXN has a risk rating of 1.75 which classifies it as a Medium risk stock.
TXN operates in a cyclical industry producing a diverse line of semiconductor products with exposure to many end markets and customers. It has moved to a predominantly analog-based company, which should generate higher margins, cash flow and result it improved returns to shareholders. TXN's strategy should generate a sustainable free cash flow in the range of 20%-30% of revenue, allowing it to repurchase shares and pay increasing dividends.
The company recently reported strong third-quarter earnings, up 20% from the second-quarter and up 29% from the prior year. Revenues of $3.5 billion were up 6.3% from the second-quarter and 8% from the prior year. Gross margin of 58.4% was up from the second-quarter and up from the prior year.
TXN enjoys strong financials including a low debt to total capital of 27%, well-below my 45% maximum. Its free cash flow payout of 42% is also well below my maximum level of 70%. The stock is currently trading at a 14.0% discount to my calculated fair value. Recently I initiated a small position in the company and plan to add to it as my allocation allows.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in TXN (0.2% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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Tags: TXN, ADI, QCOM, LLTC,