Source: Texas Instruments.
Semiconductor veteran Texas Instruments (NASDAQ: TXN) recently reported third-quarter results, and it turned out to be good news. TI stomped analyst expectations across the board, and its shares closed nearly 11% higher the next day.
But the plain earnings and revenue numbers rarely tell the whole story. That's why business leaders tend to follow up their quarterly reports with conference calls, diving deeper into key issues and fielding analyst questions on a wide range of topics. As usual, CFO Kevin March and head of investor relations Dave Pahl handled these duties for TI in the third quarter.
The call was packed with investable insights, but I understand if you don't have the time to sit through the entire 45-minute presentation. So I compiled the five most interesting tidbits I could find, presented here for your convenience.
1. Merger strategy
We have a significant scale advantage, and we believe we are focused on the two best opportunities that are out there today, being analog and better processing.When we do think about M&A, our approach is really to focus on the right strategic fit, one that can generate long-term returns and excess free cash flows, so we really do focus on the numbers that the acquisition might lead us to.
By strategic fit, I'm talking really our biases toward analog. If we were to look at an acquisition, it would probably be a company that is going to be broad in catalog, have a diverse customer base, have a large percentage of its revenue coming from industrial and automotive, probably have a very talented R&D team.
-- Kevin March
Hot on the heels of this succinct M&A strategy summary, the usual rumor brokers started talking about TI kicking the tires of Maxim Integrated Products (NASDAQ: MXIM).
Maxim's customer list certainly matches TI's wish list, topped by automotive and industrial clients. The company also focuses on exactly the type of analog and mixed-signal products that TI covets. Maxim also comes with gross margins right in TI's zip code and positive cash flows. Granted, Maxim's $11.3 billion market cap and $10.7 billion enterprise value would be a big bite for TI, which only has $2.7 billion of cash on its balance sheet today. But that's what stock-based buyouts were made for, right?
However, neither TI nor Maxim have expanded on this rumor since it was reported in October. Maybe the speculators should have stuck around for Kevin March's next big takeaway...
CFO Kevin March. Source: Texas Instruments.
2. Yes, we love buying TI shares
With all that said, and we take a look at what's out there, we have been actually buying our favorite semi-conductor company. I know you don't like to hear it that way, but through our own stock buybacks.Today by buying back those shares we are getting a 7% free cash flow yield on those shares, and we don't have any integration risk and no bankruptcies, just a whole lot easier way to run the business and focus on customers.
-- March
Right, so why should TI go looking for complicated, expensive merger ideas when it could simply invest a ton of cash into its own stock?
Buybacks are not always the best investment idea available, and plenty of shareholder value has been destroyed by over-enthusiastic repurchase policies.
But March has a point here. TI does generate more free cash per share than Maxim (whose ratio stops at 5.3%). And again, this would certainly be a large and complex buyout. Staying the course is always a valid option, and it might even be the best choice in this case.
3. Why we love cash flows
We believe that free cash flow growth, especially on a per-share basis, is most important to maximizing shareholder value in the long term. Free cash flow for the trailing 12 month period was $3.6 billion, up 4% from a year ago.We also believe that free cash flow will be valued only if it is returned to shareholders or productively invested in the business. For the trailing 12 month period, we returned $4.2 billion of cash to investors through a combination of stock repurchases and dividends.
-- Dave Pahl
IR director Dave Pahl. Source: Texas Instruments.
Do the math, and you'll see that TI actually spent more than 100% of its trailing cash flows on dividends and buybacks in the last four quarters.
Here, let's have Kevin March weigh in with some additional detail:
4. Buybacks and dividends
In September, we announced our quarterly dividend increase of $0.04 per-share, a 12% increase. This was the 12th consecutive year in which we've increased the dividend to our shareholders.We also announced a $7.5 billion increase to our share buyback authorization. In the third quarter TI paid $348 million in dividends and repurchased $790 million of our stock for a total return of $1.14 billion.
-- March
Again, that's $1.14 billion sent as directly as possible into the pockets of shareholders, out of $0.96 billion in third-quarter free cash flows. The company isn't afraid to dip into its cash reserves to keep this investor-friendly policy going.
None of this is news to seasoned TI investors. The company has preached this mantra for many years, and management walks the talk. Dividends per share have increased more than tenfold over the last decade, and the effective buyback action has nearly doubled in three years.
5. Diversity as a weapon
The beauty of the TI model is that we have tens of thousands of customers buying tens of thousands of parts into almost every electrical and electronic market that's out there, and the diversity is what is really paying off for our shareholders in free cash flow generation.-- March
No single customer accounted for more than 8% of TI's sales in the third quarter, and no individual end market stood for more than 4% of sales.
This stock may move on general economic trends, but TI just isn't vulnerable to smaller shifts that only affect a handful of customers or a small number of street-level markets. Safe as houses, I'd say -- and coupled with that fantastic dividend-and-buyback policy, TI always looks like a solid choice for safety-oriented investors.
