Have you ever heard about INTEL or NVIDIA? Perhaps you have these on your computer?
Then you have to take a look with me into Texas Instruments Incorporated(TXN).
This company designs, manufactures, and sells semiconductors to electronics designers and manufacturers worldwide. Currently in a world where we have a high demand for batteries and chips this company has a big upside in the future.
Market Cap: $151b Founded: 1930 S&P Rating: A+
News about TXN:
- The CEO acts like an owner. As of their last report, the main goal is to maximize their free cash flow which is what we are looking for as an investor.
- Sticky products and custom software. In this way, the customer will come back for their products over and over again. They generated $14.46 billion in revenue in 2020. 75% of this amount they made from analog products like sensors and temperature/pressure devices which will need in the future for 5G.
- Negative point is that TXN insiders have sold a significant amount of shares in the past 3 months.
Current situation and past performance…
Over the last 20 years, the company was able to generate a total return of 9.3% of investors’ money every year. Currently, Texas Instruments Incorporated has a PEG ratio of 1.95 compared to the Semiconductor – General industry’s PEG ratio of 1.87. The overall P/E ratio was always under 25!
The company pays right now a 3.05% dividend yield which is better than the S&P500. Currently, it does have the best yield compared to the past and this is better than the average in this industry. 19 years record of dividend-paying and increasing. The payout ratio is very good; I like to see payout ratios under 65% so that this company has only a 53% payout ratio is a win for me.
If you want to take your stake from TXN then it is a perfect time! Buy some shares before 28. October is the Ex-dividend date and takes your first check!
Dividend growth in the past was outstanding. The 10-year average is 21.46% growth percent/ year!
Share buybacks can be a silent killer. If the company does not buy back shares but dilutes them then your investments are worth less over time. It is like a slice of cake where your slice will be smaller if the company dilutes its shareholders. TXN is doing a good job here but not excellent. Last year they issued some shares but before they were buying back shares over the years.
Forecasting, future growth
The future does look good for investors. Based on 4 analysts the estimated long-term future growth rate is 10% yearly. Analysts have a scorecard also which tells me that TXN beats these expectations around 62% of the time.
+ TXN has more cash than its total debt.
– TXN’s debt to equity ratio has increased from 33.5% to 51.4% over the past 5 years.
+ TXN’s debt is well covered by operating cash flow (120.1%).
Valuation and Fair Value
I use the most widely accepted method to calculate the fair value of a company which is the Discounted Cash Flow(DCF). It is based on the premise that the fair value of a company is the total value of its future free cash flows discounted back to today’s prices. I use analysts’ estimates of cash flows and assume the company grows at a stable rate into perpetuity.
(Total Equity Value = Present value of next 10 years cash flows + Terminal Value = $49.128 + $79.153 = $128.280,52 Equity Value per Share (USD) = Total value / Shares Outstanding = $128.281 / 914 = $140,4)
Overall and my takeaway…
I review rarely companies that are overvalued and in my opinion if I look at this with my gut feelings I think TXN is a strong and currently fairly valued company and they can maintain their position in the market right now they are in the margin of safety categories.
TXN has a very talented shareholder-friendly Management team. I suspect in October there will be another dividend increase. I think TXN intends and is capable of attaining the title of Dividend Aristocrat. TXN will be a key beneficiary of the Chip act. As it will help the company expand capacity and meet excess demand. Which will fuel the next leg of growth in revenues and FCF.
Disclosure: I have no stock, option, or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.