Texas Instruments (NASDAQ:TXN) is one of the most valuable publicly traded chip companies in the world, commanding a market capitalization of about $95 billion. The company is, unsurprisingly, extremely profitable, too. In 2017 it generated nearly $3.7 billion in net income, and according to analyst estimates, that figure is set to rise to about $5.57 billion in 2018.
Texas Instruments is quite good about sharing its success with its shareholders. The company says on its investor relations page that it has "committed to return all of our free cash flow to shareholders through dividends and stock repurchases."
If you're an income-oriented investor, here's why you should love Texas Instruments' dividend.
It's big and sustainable
Texas Instruments recently raised its quarterly dividend to $0.77 per share -- up more than 24% from what it had previously paid out. On an annualized basis, that works out to $3.08 per share, and based on the current share price, it translates into a dividend yield of around 3.15%. (Remember that a stock's dividend yield depends on both the dividend and the stock price, so it changes as the stock price does.)
Although this dividend is generous, the company's not biting off more than it can chew. At $3.08 per share, Texas Instruments' payout ratio -- the percentage of the company's earnings per share (EPS) that its dividend payment represents -- is almost 71% of the company's 2017 EPS of $4.36, but analysts expect Texas Instruments' EPS to grow to $5.57 this year, so the payout ratio based on that figure is a little over 55%.
Additionally, analysts expect Texas Instruments to turn in EPS of $5.54 next year -- a figure that's ever so slightly lower than what they think it'll deliver in 2018 -- which is still far more than enough to cover the current dividend with plenty left over.
Indeed, although I do expect Texas Instruments to grow its dividend again next year -- it's generally good for companies that care about their dividends to deliver annual raises -- I wouldn't expect the magnitude of the increase to be anywhere near what it was last time. Texas Instruments' EPS is on track to grow significantly in 2018, and so it made sense for the company to deliver a big raise last time. If analysts are right that the company's EPS will drop slightly in 2019, it wouldn't make sense for the company to deliver a dramatic dividend increase.
The buyback helps with the dividend, too
The obvious way for a company to grow EPS is for it to grow net income. However, it's important to remember that EPS is calculated by dividing net income by the total number of shares outstanding. This means that a company can actually increase EPS by buying back enough shares to bring its overall share count down.
Texas Instruments also throws a lot of its free cash flow at buying back stock. You can see in the chart below that the company's share count has come down nicely over time as a result of those efforts:
By bringing down its share count, Texas Instruments is -- for a given level of net income -- increasing EPS and free cash flow per share, which should ultimately translate into greater dividend-paying capacity for a fixed amount of capital.
In an ideal world, though, the amount of money that Texas Instruments is able to distribute to shareholders would go up, too, but a reduction in share count could still serve to, over time, lead to bigger dividend payments per share.