The next selection for the Inflation-Protected Income Growth Portfolio is semiconductor giant Texas Instruments (NASDAQ:TXN). Perhaps best known for its line of scientific and graphing calculators, the company has a wide array of electronic products across industries ranging from automotive to Xray. It's that broad range of products, combined with a decent valuation and dividend history, that makes Texas Instruments an attractive selection.
The company has paid a dividend since 1962, and it has been regularly raising that payment since 2004, enabled by a shift to more profitable products.
Why it's worth owning in the iPIG Portfolio
To earn a spot in the portfolio, a company has to pass a series of tests related to its dividends, its balance sheet and valuation, and how it fits from a portfolio diversification perspective.
- Payment: The company's annual dividend currently sits at $0.84 a share, a yield of about 2.7% based on Monday's closing price.
- Growth history: The company has paid higher dividends every year since it started increasing its dividends in 2004. Its most recent increase was a substantial 23.5% for its fourth-quarter 2012 payment. While that rate of increase isn't likely sustainable, it does showcase the company's commitment to its dividend in spite of the looming investment tax law changes.
- Reason to believe the growth can continue: With a payout ratio of 44%, the company retains more than half of its income to reinvest for future growth. Additionally, since the company's cash flow statement indicates that its earnings are covered by cold, hard cash, there's little risk that a near-term cash crunch will derail those plans.
Balance sheet and valuation:
- Balance sheet: A debt-to-equity ratio of 0.5 indicates that the company does use debt, but sparingly, and it certainly hasn't overleveraged itself to the point where a near-term financial hiccup would derail it.
- Valuation: By a discounted cash flow analysis, the company looks to be worth around $37.9 billion, making its recent market price of $34.6 billion look reasonable. Of course, there's some risk involved. For instance, the company is winding down its mobile business, driven in part by Apple's (NASDAQ:AAPL)heavy investment in its own mobile chip line. Any time a company jettisons a profitable business line, it adds risk to its value, and this is no different.
The previous picks for the portfolio included:
- An industrial conglomerate
- A generic-pharmaceutical powerhouse
- A provider of staple foods
- An auto parts distributor
- A safety equipment provider
- A high-tech (software) titan
- A toy maker
- An electric utility
- A shipping company
- A pipeline giant
- A drugstore
While Texas Instruments is a high-tech powerhouse similar to existing iPIG portfolio pick Microsoft (NASDAQ:MSFT), Microsoft's focus is computer software, with some hardware. Texas Instruments, on the other hand, is very much hardware-focused and has a very strong industrial customer base.
While not perfect diversification, Texas Instruments is a better fit for the portfolio from a diversification perspective than fellow semiconductor titan Intel (NASDAQ:INTC). Intel's bread and butter is the computer hardware that Microsoft's software runs on, and while Intel's valuation also looked compelling, it was simply too closely linked to Microsoft to justify owning both. It's all part of the balancing act needed to manage across risks in investing.
What are the risks?
As mentioned above, Texas Instruments is winding down its mobile division, which could hurt its profitability in the near term. As fellow Fool Anders Bylund recently pointed out, though, it could be a blessing in disguise, as it shows that Texas Instruments knows not to throw good money after bad in an arms race it may not win. After all, look what happened to Advanced Micro Devices (NASDAQ:AMD) after fighting and losing its long-term, very costly microprocessor battle with Intel.
Additionally, Texas Instruments made a big bet on its analog business in 2011 when it acquired National Semiconductor. While nobody is anticipating the death of analog electronics anytime soon, Intel's recent unveiling of a digital radio shows the potential for digital technology to take on analog even in its bastions of strength.
What comes next?
When the Fool's disclosure policy allows, I plan to buy Texas Instruments' stock for the Inflation-Protected Income Growth portfolio, as long as its share price remains below $33. I expect to invest around $1,500 in the selection, giving it a 5% allocation in the portfolio, with 40% of the portfolio still remaining cash. Watch my article feed for details of the next pick, coming soon.