When it comes to semiconductor stocks, investors tend to focus on growth, and the Rich Templeton era at Texas Instruments (TI) (TXN 2.20%) shows this well. Templeton, who became CEO in May 2004, grew the stock's value by more than 600% over his tenure.
But as Templeton moves on to chairman in April, investors should also note his role in making TI one of the more notable dividend stocks in the tech space. That change in focus added significantly to the stock gains and provided a lesson on the importance of dividend growth for TI and other stocks.
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Key Data Points
TI's dividend return
When Templeton took over TI, its annual dividend stood at only $0.089 per share, amounting to a return of less than 0.4%. Thus, those who invested in TI when Templeton took over probably did not expect to earn significant dividend income.
However, in Templeton's first year, TI passed an 18% payout hike and began a pattern of annual dividend increases that averaged 25% between 2004 and 2021. After 19 consecutive annual payout hikes, its dividend investors now earn $4.96 per share annually. This amounts to a 2.8% cash return for new investors, well above the S&P 500 average of 1.7%.
For those who invested $10,000 on Templeton's first day (a 400-share position at $25 per share) and held the shares, the dividend pays about a 20% return on their original investment. Additionally, total payouts over that period top $12,100, meaning they have received more than their initial investment back in cash without selling a single share!
Putting TI's dividend into perspective
That original $10,000 investment from 2004 would be worth approximately $71,000 as of the time of this writing, not including the quarterly payouts. This means the majority of the total return came from stock price growth.
While that makes TI still primarily a growth investment, investors should not discount the importance of this dividend. First, TI stock more than doubled the S&P 500's total return. Second, shareholders who chose to reinvest the dividends earned a total return of around 970%.
Moreover, the dividend payment likely had a stabilizing effect on the stock and the overall company. When an income stream increases by 25% per year on average, investors are less likely to sell the stock.
It also incentivizes the company to produce positive free cash flows. Fortunately, free cash flow is not an issue for TI. In 2022, it generated $5.9 billion in free cash flow. Although free cash flow fell 6% from year-ago levels, TI did not struggle to fund the dividend cost of $4.3 billion for the year. The dividend has also not interfered with plans to repurchase shares and build additional fabs.
The future of the TI dividend
Admittedly, the company has yet to comment on what direction the dividend will take when Haviv Ilan becomes CEO in April. The 8% payout hike passed late last year was a smaller increase than in the past, and shareholders should always remember that TI faces no legal obligation to pay a dividend at all.
However, investors tend to expect annual increases when a streak has existed for many years. The company will likely not want to upset shareholders by ending such a streak unless necessary. Ilan, the current COO, has worked at TI for 23 years and prospered under Templeton's leadership, making dramatic changes less likely.
Finally, the growth of artificial intelligence, the Internet of Things, 5G, and other industries will probably increase demand for TI's chips over the next few years. Such factors not only bode well for the company's stock price growth, but also make it probable that TI will remain one of the more notable dividend-paying tech stocks.
