There are dividend raises, and there are dividend raises. Texas Instruments' (TXN +0.31%) latest hike falls squarely into the second category -- the veteran analog chipmaker announced a nearly 24% increase in its payout, while also launching a fresh $6 billion share buyback program.
Texas Instruments likes its Texas-sized dividend raises. Its latest one is more than twice as high as the most recent rises from dividend-paying tech giants Cisco (CSCO +0.58%) and Microsoft (MSFT 1.57%). Does that mean this boost is too much? Here's what I think.
Image source: Texas Instruments.
Prudent spendthrift
First, the details -- Texas Instruments' quarterly payout will rise to $0.62 per share; this will be handed out on Nov. 13 to shareholders of record as of Oct. 31. The payout ratio is 60%. It would yield 2.8% at the current share price, which falls roughly between Microsoft's 2.3% and Cisco's 3.4%.
The $6 billion fresh share repurchase authorization is on top of $4.6 billion from the company's existing program. No end date was specified for the new initiative.
Although a 24% dividend hike feels like a big jump, it's not being done recklessly. This is a company that is very prudent and careful with its cash management. In fact, it posts its capital allocation strategy online for all to see, updating it as necessary. This set of slides lays out the company's philosophy succinctly: "TI is in a unique class of companies: able to grow, generate and return cash to shareholders for a long time to come."
This is true. One of the slides details how capital was allocated from 2007 to 2016. The top spending bucket was research and development, sales/marketing, capital expenditures and inventory, aimed at growing business organically. This took up 44% of the $73 billion allocated during the period. The percentage for the share buyback and dividends buckets combined was only slightly higher.
The company's consistent profitability gives it the financial muscle to spread the wealth around this way. Fueled by demand from the automotive and industrial sectors for its analog chips, Texas Instruments has been posting stellar fundamentals lately. Its estimates-beating Q2 was very strong; revenue rose by almost 14% on a year-over-year basis (to $3.69 billion), while net profit zoomed 29% higher to just over $1 billion.
In fact, on a trailing-12-month basis, the company has boasted higher margins than both Microsoft and Cisco.
Meanwhile, long-term debt has been falling over the past few years, and is now at the point where the company could almost retire it with the cash it has on hand. Speaking of the green stuff, it's been rising nicely in recent times, with free cash flow clocking in at over $4.0 billion over the last year. That's sufficient to cover both the dividend and the company's share buybacks -- and it provides room for more of both.
An instrumental player
Analysts are expecting the good times to continue for Texas Instruments. On average, they're estimating a nearly 20% rise in per-share earnings for this fiscal year, on the back of a 10% improvement in revenue.
The company's sharp focus on the automobile space, with its relentless push toward autonomous driving and the ever-automating industrial sector, bodes very well for the future of its business. Mix in Texas Instruments' enviable position in the Internet of Things (IoT) race and you've got a company beautifully poised for growth.
You've also got an enterprise that has a growing cash pile it can use for shareholder-pleasing moves like enhanced buybacks and higher dividends. So I don't feel that the latest dividend raise -- or the new share buyback authorization, while we're at it -- is extreme. On the contrary, both are sensible decisions by a company that's very good at managing its cash.
