One Of The Most Shareholder-Friendly Companies On The Planet...

Nathan Slaughter's picture

Monday, September 9, 2019 - 12:00am

by Nathan Slaughter

As some of you may know, I've spent some time over the past couple weeks telling readers about how our Daily Paycheck strategy works. 

At its core, the strategy is all about finding the market's safest, strongest dividend payers and letting them pay you year after year. As I've mentioned before, when you look at the data, it's obvious that dividend-paying stocks are the most reliable way to grow your money in the entire investing universe.

But today, I want to go one step further by sharing just one of our 45 income-paying holdings with you. By the time you're finished reading about it, you'll not only see why a bigger yield isn't always necessarily better -- but you'll also see just how rewarding it can be when a company produces a bundle of cash flow and uses a chunk of it to aggressively buy back its own shares...


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A Dominant Chipmaker
TI calculatorBack in high school, I remember getting my first Texas Instruments (NYSE: TXN) graphing calculator for AP calculus and marveling at its capabilities. The company still makes school calculators, although they are a tiny part of the mix.

TI is a premier semiconductor design and manufacturing company, primarily specializing in analog chips used in a wide variety of applications. The biggest sources of demand are the automotive and industrial fields, but the firm's products can be found in everything from smartphones to medical devices to aerospace equipment.

Analog chips help convert real-world inputs (like temperature, speech, video and light) into the digital computer language of 1s and 0s. In that sense, they act as something of a translator inside a multitude of devices. Texas Instruments is the largest analog chip producer in the world.

Biggest doesn't always mean best. But in this case, TI is also one of the most efficient, low-cost producers.

Over the years, it has been an opportunistic buyer of advanced 300-millimeter manufacturing equipment at dirt-cheap prices (often from defunct rivals liquidating their assets). On a per-unit basis, production from 300MM facilities is roughly 40% less expensive than the output from 200MM equipment used by most other competitors.

That helps explain the firm's lofty gross profit margin of 65%. At the same time, capital expenditure requirements are modest (eating up about 5% of sales in an average year). As a result, TI produces buckets of free cash flow (FCF) – one of my favorite traits.

Management aims to produce between 25 and 35 cents of FCF for every dollar of revenue. It met that goal and then some over the past 12 months, generating $5.9 billion in free cash flow from $15.2 billion in revenues, a ratio of 38.8%. Most businesses are less than half as efficient, meaning they would need more than $30 billion in revenue to produce the same level of cash flow.

Texas Instruments ranks in the 91st percentile in FCF generation, outperforming more than nine out of every 10 U.S. companies. And it's at the top of the charts (97th percentile) in returns on invested capital. 

Here's where it gets even better...

TI logo

One Of The Most Shareholder-Friendly Companies Around
Since 2004, the number of outstanding TXN shares has been nearly cut in half thanks to ongoing stock buybacks. The share count has dropped to 933 million from 1.7 billion. That means shareholders now have almost twice the pro-rate ownership interest that they used to.

​Without the buybacks, the $5.9 billion in free cash flow would have represented $3.55 per share. But now, those cash profits stretch much further... to $6.32 per share.

That's of paramount importance to us – considering this shareholder-friendly company returns 100% of FCF, every last penny, to stockholders. Management intends to deliver between 40% and 60% via annual dividends (right in the sweet spot) and the rest through continued stock buybacks to shrink the share base even further.

As for the dividend portion, Texas Instruments has raised distributions for 15 consecutive years. And unlike some that increase by only a penny or two per year, TI's payouts have been climbing at a robust 20% compounded annual growth rate.

The most recent hike was a 24% increase, which lifted the annual distribution to $3.08 per share – for an above-average yield of nearly 3%. And with a conservative payout ratio of just 53%, this dividend stream is well supported.

Texas Instruments is positioned to keep gushing cash and producing superior returns for decades to come. The wide-moat business is a global leader in an attractive, fragmented, and fast-growing market. Its analog production facilities have a lifespan of 20 to 30 years with minimal investment (unlike digital chip foundries, which require constant re-tooling to stay on the cutting edge).

And we're still in the very early innings of the internet of things (IoT) revolution, where billions of household and industrial devices are becoming internet-connected and reliant on analog sensors to process data. According to market research firm IC Insights, this sector will see the fastest growth within the broader semiconductor industry, with sales expanding 6.6% annually over the next five years.

If that forecast is accurate, this market will expand to $75 billion from $55 billion – and TI has the inside track.

Recent Performance And Outlook
Between the impact of the trade war and sluggish global demand for semiconductors, the market wasn't expecting much from TI's latest quarterly report. Sure enough, earnings dipped slightly from a year ago, slipping 3% to $1.36 per share.

Fortunately, the bar had been set even lower at $1.22. Investors breathed a collective sigh of relief, driving TXN up 7% to $128.80 on July 24 – a new all-time peak.

Sales of analog chips (the firm's bread and butter) are down about 6% year-over-year. But reassuring comments from several chipmakers have pacified investors and provided hope that the current slowdown will give way to a recovery in the second half.

Management is anticipating third-quarter sales to hit $3.8 billion, a sequential improvement of 4%. And earnings are forecast to land between $1.31 and $1.53. The mid-point of that range would be $1.42 per share, north of the current consensus estimate of $1.38.

Action to Take 
Strong margins, disciplined balance sheet management, ample cash generation, growing demand. Check, check, check and check.

Since 2004, Texas Instruments has managed to increase free cash flow per share by 12% annually. And the road ahead looks even brighter. Bulls have been piling into TXN, with unusually heavy action in the options pits. Meanwhile, numerous Wall Street analysts have upped their targets on the stock, including Jefferies – which raised its target from $137 to an optimistic $170.

Bottom line, I am a huge fan of this cash-producing business. That's why I added it to the Daily Paycheck portfolio back in April -- and we're sitting on a nice 15% gain in just five months. New buyers of the stock might have a bit of pause about the current valuation, but I still have the stock rated as a "buy."

In the meantime, you can visit this page to learn more about our strategy and gain access our entire portfolio.

Nathan Slaughter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.