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There are plenty of technology stocks that pay dividends these days. That wasn’t always the case, but in the post-financial crisis era, investors demand cash in their pockets. In response, several companies in the tech sector have initiated dividend payouts.
With that in mind, it might seem like Texas Instruments (NASDAQ: TXN) is just another dividend stock. But Texas Instruments is no ordinary dividend payer.
That’s because Texas Instruments grows its dividend at much higher rates than many other tech stocks, especially within the semiconductor industry. This high dividend growth is possible because of Texas Instruments’ streamlined business model and impeccable execution.
In addition, Texas Instruments also enjoys a unique advantage that places it in truly rare territory. The company holds the vast majority of its cash here in the United States. Unlike most other tech companies, which keep the bulk of their cash overseas, Texas Instruments has access to its own cash.
Strategy Aimed at Higher Growth
Texas Instruments focuses primarily in two key segments: Analog and Embedded processing. These two areas represented approximately 83% of the company’s revenue last year. The concentrated nature of its business is the result of a change of strategic direction a few years ago. Then, Texas Instruments management decided to unload underperforming businesses, such as its wireless unit, to instead focus on its core competencies.
From there, the company reduced its exposure to wireless virtually entirely. Management felt that analog and processing were far more lucrative, higher-growth opportunities, and it’s clear this was the right strategy.
Texas Instruments holds a differentiated position that separates it from the competition because its remaining core areas of focus have high-value assets and products, with long life cycles. This has created sustained revenue and free cash flow growth during the past several years.
Returning Cash to Shareholders
According to the company, Texas Instruments grew revenue by 9% per year from 2009-2014. The company enjoys low capital expenditures, which results in a lot of free cash. In fact, it generated $3.6 billion in free cash flow over the past 12 months, up 17% from the year over year period.
As Texas Instruments rakes in cash, it aggressively returns cash to shareholders. It’s returned $4.1 billion in share buybacks and dividends in the past four quarters. In fact, Texas Instruments has reduced its share count by 39% in the past decade.
Texas Instruments pays a hefty 2.5% dividend, which is well above the 2% average yield for the S&P 500. Over the past five years, it’s raised its dividend by 23% compounded annually.
Going forward, there’s plenty of room for future dividend growth. First, the company’s dividend represented just 37% of its trailing 12-month free cash flow. That is a very modest payout ratio, and since free cash flow is growing, Texas Instruments can easily afford double-digit dividend growth each year. Second, Texas Instruments has a solid balance sheet. Its long-term debt-to-equity ratio is just 35%, which means it won’t have to utilize a lot of cash to paying down debt. In turn, that cash can be returned to shareholders.
Cash Holdings in the U.S.
In addition, another key advantage that will allow Texas Instruments to aggressively increase its dividend is because it holds 82% of its cash in the United States. Consider that Apple (NASDAQ: AAPL) holds approximately 90% of its cash outside the United States. Apple is hugely profitable and has grown earnings by much higher rates than Texas Instruments, but Apple only increased its dividend by 11% this year.
Tech companies have not signaled any intent to bring their cash back home, which makes sense because that cash would be subject to a significant repatriation tax penalty. Because of this, many tech companies can’t raise their dividends by much larger amounts, even though they hold massive amounts of cash on the balance sheet.
To summarize, Texas Instruments is a streamlined business with a laser-like focus on the two key industries it dominates. It’s got a lot of cash on the balance sheet with very low debt levels. And, the company can actually access that cash, unlike many of its tech rivals. Add it all up, and Texas Instruments is a top dividend stock.
Dividends for Every Month of the Year
If you’re looking for just one dividend stock to round out your income stream, consider a little-known company that pays out dividends 12 months of the year.
Click here to see the full details of this company in my Dividend Calendar…