Company Description: Texas Instruments Inc. is one 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. When also considering the NPV MMA Differential, the stock is trading at a slight discount to its calculated fair value of $203.64. 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 one Star in this section for 2.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45% The company has paid a cash dividend to shareholders every year since 1962 and has increased its dividend payments for 22 consecutive years.
The NPV MMA Diff. of the $213 is below the $1,400 target I look for in a stock that has increased dividends as long as TXN has. If TXN grows its dividend at 3.6% per year, it will take 5 years to equal a MMA yielding an estimated 20-year average rate of 3.75%.
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
The negative NPV MMA Diff. means that on a NPV basis the dividend earnings from an investment in TXN would be less than a similar amount invested in MMA earning a 20-year average rate of 3.75%. If TXN grows its dividend at 3.4% per year, it will never equal a MMA yielding an estimated 20-year average rate of 3.75%.
Peers: The company's peer group includes: Analog Devices, Inc. (ADI) with a 1.7% yield and QUALCOMM Incorporated (QCOM) with a 2.1% yield.
Conclusion: TXN earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of two Stars. This quantitatively ranks TXN as a 2-Star Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $100.68 before TXN's NPV MMA Differential increased to the $1,300 minimum that I look for in a stock with 22 years of consecutive dividend increases. At that price the stock would yield 5.4%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,300 NPV MMA Differential, the calculated rate is 10.2%. This dividend growth rate is higher than the 3.4% used in this analysis, thus providing no margin of safety. TXN has a risk rating of 1.50 which classifies it as a Low 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 enjoys strong financials including a low debt to total capital of 45% (up from 40%), but still well-below my 45% maximum. Its free cash flow payout of 333% (down from 353%) is well-above my maximum level of 60%, and is not sustainable long-term. The stock is currently trading at a 0.8% discount to my calculated fair value. I will wait for a more opportune time before adding to my position.
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 (1.1% of my Dividend Growth Portfolio).
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