If the term cash cow could be applied to any company this is Texas Instruments.
Texas Instruments (NASDAQ: TXN) initiated its activities in the 1940’s applying signal processing technologies for submarine detection and radars.
In the 1950’s TI became one of the protagonists of the electronic age led by key inventions that would revolutionize industrial and commercial activity worldwide. Namely, the invention of the metal-oxide semiconductor field effect transistor or MOSFET by Bell Labs was and still is the single most important advancement in the field of electronics.
TI has been one of the most important players in expanding the boundaries of possibilities opened by this new technology: it invented the first silicon transistor and the first integrated circuit in 1958.
In the 2000’s TI focused on expanding analog and digital embedded processors (microprocessors which control mechanical or electrical functions within a system), which are increasingly pervasive and found in almost any electronic device today from consumer electronics, cars to industrial machines.
By focusing on the most profitable industrial and automotive markets and leveraging on its cost-efficient manufacturing installed capacity with minimum capital spending requirements, TI has become a sustained cash-flow generator for the last 15 years.
Free cash flow generation has been strong and steady since 2004, leading the company to put in place a capital management strategy of returning cash flow to shareholders through dividends and stock repurchase.
Rich Templeton’s TI’s CEO synthetizes this reality: "The ultimate measure for any enterprise is superior long-term growth of free cash flow."
To illustrate the numbers involved: in 2018, TI generated $6.1 billion of free cash flow (cash flow from operations less capital expenditures), or 38.4 percent of revenue, and returned $7.7 billion in total to its owners.
Best markets, best products
The semiconductor industry is a coveted business of $412 bn annual revenues as of 2017, increasing every year, dominated by brands such as Intel, Broadcom, Ndivia, and also Texas Instruments.
To ensure its competitive position over the next decade TI has set a strategy of focusing on the best markets and products, leading its marketing efforts towards selling analog and digital embedded processors (a segment in which TI holds a 18% share) primarily to industrial and automotive customers.
The semiconductor content in industrial and automotive applications will significantly increase as chip content continues to expand, and as cars will have more electronic applications, especially with the expansion of hybrid, electric and autonomous vehicles.
The industrial market looks promising as it is in the early stages of semiconductor adoption. Applications in this segment range from simple ones such as smart thermostats, door locks and appliances can sense motion, humidity, temperature, and then transmit diagnostic information wirelessly to initiate a service call. More complex applications found in factories can range from smart motors that use less energy, to robotic assembly lines that use sensing technology to operate more autonomously and precisely.
The breadth of TI’s product portfolio suits these markets, better than competitors’ focusing on one product. Ti sells a wider catalog of applications, matching small and large-scale industrial projects, cementing lasting relationships. Thus, there is a continuous source of revenue for many years, as opposed to the 18 to 24-month typical product life cycle.
Another key competitive advantage is its in house 300-mm manufacturing facilities, which translates into cost saving production ahead of competitors.
Only good news for shareholders
Despite weak 2019 1Q results due to US-China tensions, the last ten-year performance shows consistent good news for its shareholders marked by 15 years in a row of increased dividends representing $13 bn, 45% reduction of share count since 2004 ($25 bn paid on share repurchase), and $7 billion invested on acquisitions.
Revenues grew 5.50% from 14.96bn to 15.78bn in 2018. In addition, the company has reduced the cost of goods sold, administrative expenses and interest paid as a percent of sales. These improvements contributed to 51.55% net income growth from 3.68bn to 5.58bn.
In October 2018, TI raised its quarterly dividend 24 percent to $0.77/share, or $3.08 annualized. Dividends have been increased at a compounded annual growth rate of 21% over the last five years.
According to the Financial Times “The positive trend in dividend payments is noteworthy since very few companies in the Semiconductors industry pay a dividend. Additionally when measured on a five year annualized basis, dividend per share growth is above the industry average”
Any investor who is in wont of a piece of good news every quarter is advised to join the Texas Instruments shareholders club, and will most likely not be disappointed.