Friday, February 3, 2023

Texas Instruments Inc. (TXN) Dividend Stock Analysis

Linked here is a detailed quantitative analysis of Texas Instruments Inc. (TXN). Below are some highlights from the above linked analysis:

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 discount to 2.) and 3.) above. When also considering the NPV MMA Differential, the stock is trading at a 39.9% premium to its calculated fair value of $125.27. TXN did not earn any Stars in this section.

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 20 consecutive years.

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 (2011-2014, 2012-2015, 2013-2016, 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 18 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

The NPV MMA Diff. of the $310 is below the $1,500 target I look for in a stock that has increased dividends as long as TXN has. If TXN grows its dividend at 5.8% per year, it will take 6 years to 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 2.2% yield.

Conclusion: TXN did not earn any Stars 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 one Star. This quantitatively ranks TXN as a 1-Star Very Weak stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $109.51 before TXN's NPV MMA Differential decreased to the $1,500 minimum that I look for in a stock with 20 years of consecutive dividend increases. At that price the stock would yield 4.5%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,500 NPV MMA Differential, the calculated rate is 10.3%. This dividend growth rate is higher than the 5.8% used in this analysis, thus providing no margin of safety. TXN has a risk rating of 2.00 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 enjoys strong financials including a low debt to total capital of 37% (down from 39%), well-below my 45% maximum. Its free cash flow payout of 77% (up from 55%) is above my maximum level of 60%. The stock is currently trading at a 39.9% premium to my calculated fair value. I will continue to add to my position 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 (1.1% of my Dividend Growth Portfolio).

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