Texas Instruments: A Hidden Dividend Gem

The technology sector is home to some of the biggest companies in the entire market. In fact, four out of the top six market caps in the S&P 500 belong to tech stocks. As a result, the industry goliaths tend to overshadow other tech stocks, which go relatively unnoticed by comparison.Texas Instruments stock
Texas Instruments (NASDAQ: TXN) may not be among the most widely held tech stocks, but it deserves a lot more coverage than it gets. Texas Instruments stock is up 40% in the past year including dividends. It has trounced the S&P 500 in the same time and most of its sector peers.
It’s not only the stock that’s an attraction. The Texas Instruments dividend also shines. Texas Instruments offers a 2% yield, and enjoys a unique advantage that could make it a hidden gem dividend growth stock going forward.

Renewed Focus on Efficiency

Texas Instruments has quietly delivered excellent returns to its investors over a long period of time. Since 2004, the company grew free cash flow at a 7% compound annual rate. It has reduced its share count by more than 40% in the same time. And, it has raised its shareholder dividend for 12 years in a row.
All of this is because of Texas Instruments’ high profitability and excellent free cash flow. Several years ago, Texas Instruments placed a renewed emphasis on efficiency. The company divested slow-growth businesses to focus on two specific businesses, analog and embedded processing.
Now, analog and embedded processing represent more than 80% of Texas Instruments’ total revenue. Focusing on these businesses has also created opportunity to grow free cash flow at a high rate because manufacturing assets in these areas can be bought on the cheap to maximize efficiency. As a result, over the past year, Texas Instruments’ free cash flow increased 7% to $3.9 billion.
Texas Instruments’ strategy has proven to be extremely effective. On July 26, the company reported quarterly revenue and profit that both beat analyst expectations. Last quarter, total profit rose 17% from the same quarter last year. Revenue came in at $3.27 billion, up 1.3%. In addition, management’s current-quarter guidance came in above analyst forecasts.
Texas Instruments expects $0.81 to $0.91 per share of earnings and $3.34 to $3.62 billion of revenue in the current quarter, while analysts were expecting $3.38 billion in revenue and $0.81 per share of profit for the period.

Texas Instruments Dividend: More Increases Ahead

Going forward, Texas Instruments should be able to increase its dividend at double-digit rates each year, as it has done recently. Last year, the Texas Instruments dividend was raised by 12%.
Texas Instruments has a 51% dividend payout ratio, which is the percentage of profit distributed to shareholders. This is a modest level which leaves plenty of room for continued dividend hikes. And, Texas Instruments also has unique advantage over many other tech firms, which is that the majority of its cash is held domestically.
At the end of last quarter, Texas Instruments held $2.5 billion in cash, equivalents, and short-term investments on its balance sheet. Even better, 80% of its cash on hand is held within domestic entities.
This could separate it from its industry peers moving forward. While it is not uncommon to find large cash balances in the tech sector, it is also not uncommon for the vast majority of tech cash is held overseas. If the companies wanted to bring that cash back to U.S. shareholders for dividends, they would be subject to significant repatriation taxes.
That is why, to date, most of that cash has not been returned. Instead, companies have borrowed money to buy back stock to satisfy investors’ desire for cash returns. But for investors who prefer dividends, Texas Instruments could be the better choice going forward.

Under the Radar

When investors think of tech stocks, they usually think of the sector heavyweights. Texas Instruments might fly under most investors’ radars, but it has proven to be an excellent investment for many years.
Going forward, Texas Instruments is expected to continue growing revenue, profit, and dividends for many years to come. Its high free cash flow and dividend growth potential could be attractive for income investors.

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