Richer, Wiser, Happier – Book Review

Every now and again you come across a book that you simply cannot put down because it is blowing you away with so many profound thoughts, questions and wisdom. I just happened to stumble upon one such book titled “Richer, Wiser, Happier” by William Green. I had first heard of this book when I was listening to William Green being interviewed on The Investor’s Podcast’s show. Since then, I have heard of this book on several other channels and social media with very high recommendations. I stumbled on this book on another recent trip to the library and said to myself “Wow! I cannot wait to read this!”.

I was actually not sure what to expect from this book before reading it. Would it be simply a collection of interviews with famous investors? If yes, how it be different from the countless interviews I have already seen of these same investors. Would I learn anything new? Maybe yes, maybe no. But would there be an underlying theme common to all interviews?

All my doubts were dispelled very early in the book as I was going through the contents and reading the introduction. William has cleverly focused on crafting the chapters in this book such that each chapter corresponds to one central theme that is broadly stated such that it is applicable not just to investing, but life in general. And all of the learnings and content from the various interviews with the investors have been organized such that they would fit in this theme.

I cannot even begin to imagine the amount of material William Green must have collected for this book. Just to give you a sense of this, here is a partial list of investors that William interviewed or consulted in preparation for this book: Charlie Munger, Howard Marks, Joel Greenblatt, Bill Miller, Mohnish Pabrai, Guy Spier, Jeffrey Gundlach, Li Lu, Peter Lynch, Bill Ackman, Mario Gabelli, Sir John Templeton, Jack Bogle and so on. To distill learnings from so many smart individuals into a coherent and engaging 250-odd page book is a herculean effort.

So to further condense this book in a blog post is almost an impossible task and something that I will not even begin to attempt. Instead, I will focus on some of my key learnings from this book.

Simplicity is the Ultimate Sophistication

The best investors have the discipline not to be swayed by distractions. Have a simple strategy that makes sense to you and stick with it through thick and thin.

Joel Greenblatt

One of my biggest learnings from the book is the importance of being disciplined and having a simple, repeatable strategy. This is just a simple, yet profound idea and it is equally applicable to dividend growth investors such as myself. If you have been investing in the market over the last 2 years, you would have seen the hype surrounding stocks related to Electric Vehicles (EVs). Then the advent of other meme stocks or various cryptocurrencies where concepts surrounding valuations have been thrown out of the window. There would be comments thrown around the internet where people would “pity” dividend growth investors because of lack of capital appreciation in their portfolios.

It is extremely difficult to remain disciplined and stick to the slow and steady strategy such as dividend growth investing in the face of so many distractions. But this is what separates the serious long-term investors from those investors who keep shifting from one strategy to the other every other day of the week.

Dividend growth investing is also a relatively simple and straightforward strategy. If you understand the essence of it, you will be hugely successful with it.

Intelligent people are easily seduced by complexity while underestimating the importance of simple ideas that carry tremendous weight… when you apply a handful of such simple but powerful ideas with obsessive fervor, the cumulative effect becomes unbeatable.

– Mohnish Pabrai

And the idea that one can build a sound foundation of knowledge in investing built around such simple ideas was something that I kept finding as a common advice amongst many of these famous investors. This is one of my biggest takeaways from my book.

Beware of your emotions and biases

People are crazy and emotional. They buy and sell things in an emotional way, not in a logical way, and that’s the only reason why we have any opportunity… So if you have a way to value businesses that’s disciplined and makes sense, you should be able to take advantage of other’s emotions.

– Joel Greenblatt

Most people get led astray by being excessively careless and optimistic when they have big profits, and by getting excessively pessimistic and too cautious when they have big losses.

– Sir John Templeton

The reluctance to reexamine our views and change our minds is one of the greatest impediments to rational thinking. Instead of keeping an open mind, we tend consciously
and unconsciously to prioritize information that reinforces what we believe.

– Charlie Munger

I have written about how the investor’s biases can be a huge impediment to evaluating any investing opportunity. Emotions are similar. Unsurprisingly, this came up repeatedly in the book as well. In my opinion, for any investing strategy to be successful, the investor needs to develop a solid mindset such that he/she can stick with a strategy even during turbulent times.

One of the solutions to overcome this is something that Charlie Munger stated very eloquently as follows:

If Berkshire has made modest progress, a good deal of it is because Warren and I are very good at destroying our own best-loved ideas. Any year that you don’t destroy one of your best-loved ideas if probably a wasted year.

So it is important to seek out counter-arguments to your investment thesis for a particular company i.e. see why someone else might be bearish when you are bullish on a particular stock and vice-versa.

Don’t be afraid of taking a contrarian stance

Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive. Turn cyclicality to your advantage by behaving countercyclically.

– Howard Marks

The art of being wise is the art of knowing what to overlook….Ignore the flood of short-term financial data and recommendations gushing out of wall street, brokerage firms, which have an incentive to spur activity among investors, crank out estimates for next quarter’s EPS for thousands of companies….You need to be wired to not believe the bullshit, to not be listening.

– Nick Sleep

One common theme that I would observe among most of the investors interviewed in the book is an attitude equating to “I don’t give a f*ck what the world thinks about this, because I know I am right“. This attitude to go unorthodox, to think independently is probably very unique to most value investors. And there are times when I feel that dividend growth investing is also tied to value investing at some level, which makes dividend growth investors also share some of these qualities.

On this particular subject, I absolutely enjoyed reading about two investors called Nick Sleep and Qas Zakaria, who have a whole chapter in this book dedicated to them. Both Nick Sleep and Qas Zakaria have interesting backgrounds. Nick originally wanted to be a landscape architect and Qas, born in Iraq, wanted to be a meteorologist because he enjoyed reading weather reports. Eventually, they in meet in London and launch an investment fund called Nomad with a singular focus to return as much value back to their investors (their rough target was for every $1, they would return approx. $10 back).

In you look at the table above, for a 12 year period between Sep. 2001, to Dec. 2013, the Nomad fund very nearly achieved this goal providing a staggering annualized returns of 18.4% (after fees) in comparison to the 6.5% provided by the MSCI World Index.

One of the keys to Nomad’s success is the long-term view of thinking about investments. Quoting Nick Sleep here:

It’s all about deferred gratification. When you look at all the mistakes you make in life, private and professional, it’s almost always because you reached for some short-term fix or some short-term high… And that’s the overwhelming habit of people in the stock market. The ability to resist such urges is one of those big superpowers…You need to give it huge weight when you’re weighing what works.

As a part of this exercise, Sleep and Zakaria would perform, what they call destination analysis of every business where they would ask the following questions when analyzing:

  • What is the intended destination for this business in 10-20 years?
  • What must management be doing today to raise the probability of arriving at that destination?
  • What could prevent this company from reaching such a favorable destination?

In their quest, they came across their idea of a business model where businesses would be run by far-sighted executives whose focus would be on building revenue over time. Their first case study was Costco (ticker: COST), a company I have covered on my blog before. The company was dismissed by Wall Street due to its low profit margins. What Wall Street was not seeing was that Costco was returning value back to its shoppers by marking up the sold good by no more than 15%, while other retail stores were marking them up by approx. 30%. In return, they would charge their members a nominal annual membership fee. What this would do was build up such enormous “brand-loyalty” because members would keep coming back to shop again and again. This business model was summarized by Sleep as “increased revenues begets scale savings begets lower costs begets lower prices begets increased revenues”. They coined this business model as scale economies shared and saw similar examples in other sectors such as Dell Computers, Southwest Airlines, Tesco and then finally, the grand-daddy of them all, Amazon. This became the bedrock of their investment strategy and their overall investment success.

I would be keeping an eye out to read more about Nomad and Nick Sleep in the near future, because I find it a fascinating story.

Summary

There is so much more to write about this book because the learnings are innumerable. Each chapter in this book could have been a book by itself! Which is why I think William Green did a phenomenal job in condensing it in a digestible manner. I have tried capturing a few notes I made while reading this book. You can find them on a Twitter thread here.

I think this is one of the best investment books that I have read in my lifetime and I am very glad that I read this book very early this year. I am hopeful that I can adopt the learnings from this book and inculcate them into my investing journey. I highly recommend everyone to go buy this book and read it, because you will gain a lot out of it. I will certainly be re-reading it several times again in the years to come.

Until next time, cheers!

Discl: Long COST

Generating Passive Income using Options Trading

I have been sitting on the sidelines of option trading for a while, researching the subject and educating myself and seeing how best to use this as a medium to generate additional passive income to facilitate my dividend portfolio. I have finally decided to take the plunge after crafting a strategy that would be ideal for my situation.

There is a LOT of information out on the interweb explaining the basic terms of option trading. Unfortunately, while most of these instructions explain the basics well, they do not do a great job of elaborating the risks where such trades could go wrong. For the beginner atleast, this discussion starts to get too complicated far too quickly. In general, stock trading when not understood correctly can be a recipe for disaster. But when it comes to options, that risk is multiplied by a sizeable factor.

So what the heck is an “option”?

The textbook definition of an option is this: it is a contract that gives the buyer of the contract the opportunity to buy or sell an underlying asset at a predetermined price within a certain period of time.

There are several terms and concepts here that warrant further clarification.

  • What is an underlying asset? In our case, stocks for a particular company.
  • Since the contract is valid for only a certain period of time, each contract is associated with an expiration date.
  • The predetermined price for the contract is typically called as the strike price.
  • Notice that the definition says “gives the buyer the opportunity…”. So the buyer can choose to NOT buy the underlying asset, if the current stock price is not conducive to the trade. More on this in a second.
  • An option contract is typically defined in terms of 100s of shares i.e. 1 contract = 100 shares.

There are typically two types of options that are available for trade:

  • Call Option: This option gives the buyer an opportunity to buy an underlying asset at a strike price before expiration date.
  • Put Option: This option gives the buyer an opportunity to sell an underlying asset at a strike price before expiration date.

Call Options – Better Explained

Call options can be better understood using the following example. Consider that you are looking to a buy a house. You find a house that you like, you like its listed price and you decide to enter into a contract with the seller by providing a specific down payment (a specific non-refundable percentage of the list price). The down-payment made as a part of this contract now provides you an opportunity to buy the house at a predetermined price before the contract expires (lets assume the contract was valid for a month). During this contract period, one of two scenarios is likely to happen: you will eventually buy the house after the contract expires OR you will back out of the contract and not decide to buy the house for whatever reason. For instance, you, the buyer find out that the house has some structural issues in the foundation and you decide that you do NOT want to purchase this house anymore. You back-out of the contract. The seller gets to keep the down-payment portion. On the flip side, if you are happy with the house and the contract period expires, you will eventually buy the house at the agreed upon price and you now own the house.

The call option is very similar to the above example. The down-payment, in this case, is what is commonly referred to as the option premium. If the buyer of the option contract notices that the price of the underlying asset (i.e. the current stock price) has increased beyond the strike price, the buyer can exercise the option and buy the shares. Why? Because he is now getting those shares at a cheaper price through this contract than what the market has to offer. However, if the stock price happens to remain below the strike price during the contract period, the buyer would never exercise the option (after all why would he want to pay a higher price for the stock if he can buy it cheaper at the market price). In this case, the option contract expires worthless. The seller of the call option contract gets to keep the premium regardless of what happens with the option contract. If the first scenario plays out, the contract is said to be In-The-Money (aka ITM) i.e. the value of the stock per the option contract is below the current market value of the stock. If the second scenario plays out, the contract is said to be Out-of-the-Money (aka OTM) i.e. the value of the stock per the option contract is above the current market value of the stock.

Put Options – Better Explained

A Put option can be better understood using the following analogy/example. Lets assume you own a share of Apple (ticker: AAPL). Lets assume the stock is currently trading at $170. Due to some recent news and your own research, you have reason to believe that AAPL’s iPhone production is going to be severely impacted in the next few years that would cause a huge dent in their earnings. You are expecting the stock price to tank shortly. You would like to “buy some insurance” such that if such an event were to happen within the next month, you would be able to sell the company at a predetermined price, say $150, and walk away, thus minimizing your overall loss.

In essence, the “insurance” you are buying is the put option contract. As a part of buying the insurance, you are paying a premium to the seller thus giving you the opportunity to sell the shares of this company if the stock tanks. If the stock were to drop below your predetermined strike price ($150 from the above example) before the expiration data, you get to exercise the contract and sell your shares at higher price compared to the market value of the share (ITM). If, on the other hand, the stock never tanks below $150, you will never sell your shares and the contract would expire worthless (OTM). In either case, the seller gets to keep the premium for providing you this “insurance”.

Option Metrics

Time is a huge factor in determining the option premium for any option contract. And based on time, there are some option metrics/parameters that investors can use to determine the risks associated with any given option contract. These are typically denoted using greek alphabets and are popularly referred to as “Option Greeks”. There is a LOT that can be said about each of these, but I’ll focus on the salient ones:

  • Delta: is the rate of change of the option’s price for every $1 change in the underlying asset’s stock price. A quick use of this parameter is to determine the probability of the option contract will expire ITM.
  • Theta: This represents the amount by which the option’s price would decrease as the time to expiration approaches.
  • Gamma: represents the rate of change of delta w.r.t changes in the underlying asset’s stock price.
  • Sigma: Or more commonly referred to as “Implied Volatility” (IV), in addition to delta, is perhaps one of the most important Greeks for option traders to examine. This represents a probabilistic estimation of the market’s forecast of the movement in the underlying asset’s stock price. It can also be viewed as a gauge to estimating market risk. A higher sigma/IV would typically result in a higher option premium.

Option trading for the beginner

If you are reached this far and are still with me, please pat yourself on the back! You are now armed with a basic understanding of options. At this point there are several interesting paths forward.

In my case, my next step was to determine how to use this knowledge and make it fit into my overall investment goals. There are several strategies available to option traders, some more complicated than the others, and suitable to different investment styles. Two of the these strategies that are especially popular amongst beginners and that seemed to resonate with me were: covered calls and cash-secured puts.

I arrived at the following conclusions w.r.t these strategies and option trading in general:

  • As a beginner, it is far easier to sell options. Let me elaborate on this through the next two bullet items.
  • If you own atleast 100 shares of a particular security, selling covered call options is a great strategy if you are okay with selling a stock at a price where you believe the stock is overvalued. Why? Well, you believe that the stock is overvalued at a specific price based on your research and you are okay with selling the stock at that price. As opposed to selling x100 shares through your broker through a regular stock trade, by using a covered call strategy to wait for a your desired sell price, you get paid an option premium for waiting. If the option expires worthless, you continue to hold your 100 shares and earn a premium.
  • If you want to own atleast 100 shares of a particular security at a specific price, and you have some cash available to you, enough to cover the cost of 100 shares * specified price, selling cash-secured puts options is an ideal strategy in such a situation. Why? You are interested in opening a position in a particular security, but what the market is offering you is more expensive than your desired buy price. So you wait. But waiting as a part of a cash-secured put option strategy allows you to earn a premium. If the stock price drops and reaches your target buy price, you get assigned these 100 shares. If the stock price does NOT drop and the option expires worthless, you get to keep the premium and, potentially, re-open another option contract to repeat the same.
  • In general, we want the choose a strategy such that the option contract expires worthless most of the time i.e. OTM. Why? This reduces our risk profile in that we essentially get paid for waiting (either for the stock to drop to our reasonable buy price OR stock price to reach a desirable sell price) without actually going through a trade of the underlying asset.

Note: In the above conclusions, I have avoided option margins altogether i.e. I am ensuring that all the collateral required for the option contract are coming from me and there is no reliance on my broker.

Risks

Trading, in general, is serious business and you can lose money if you are not sure what you are doing. Option trading is no different, the stakes are a lot higher if anything. Therefore, it is worth highlighting the risks associated with such trading:

  • Call option: In the event the option gets assigned and the stock shoots to the moon, you would be missing out on capital gains that you would have otherwise been entitled to if you had held onto the stock. So you have to absolutely certain about the underlying fundamentals of the business. If you don’t do so, you run the risk of selling a multi-bagger stock.
  • Put option: In the event the option gets assigned and the stock tanks to hit rock bottom, due to something fundamentally wrong with the underlying business. In such an event, you would be holding onto stocks that could potentially be worthless.

Beyond these, I have also come to realize that I would never consider selling covered calls on most of my dividend stocks. Why? Because if the option were to get assigned, the resulting stock sell would put an immediate halt to several years of dividend compounding and hurt my original yield-on-cost. The option premium + capital gains I would make as a part of the stock sell trade would not compensate for that. This is perhaps the biggest risk of option trading in my case, so I have to be incredibly careful in choosing which stocks to employ this strategy with.

Summary

There is a LOT more to research and understand in this subject, but hopefully this gives you an ideal launchpad into this area. As always, please do your own due diligence and see how this fits into your own investments. The idea here is to keep your…options…open 🙂

Cheers!

Discl: Long AAPL

Texas Instruments – Deep-dive analysis

It has been a while since I did a deep-dive analysis post on my blog, and I wanted to pick a business that is more closer to my area of expertise i.e. firmware, semiconductors, signal processing etc. Folks, let me introduce you to Texas Instruments (ticker: TXN).

Note: In the broader semiconductor industry, Texas Instruments is commonly referred to as “TI”. However, in the interest of being consistent with the associated stock ticker, I will refer to this company as “TXN”.

The first thing that comes to most people’s minds when they hear about TXN is…..calculators! Interestingly though, in my case atleast, that is NOT how I first heard about TXN. In fact, the calculator that I used during my engineering studies was a Casio, it served me well and did its job. But if you were to think that calculators is all there is to TXN, you would be dead wrong! Let us get into that a little later in the post. First, let us go into the history and background for this company.

History & Background

TXN’s history can be traced back to two physicists who developed a seismographic process to aid in oil exploration. This parent company was called Geophysical Services Incorporated (GSI) founded in 1930. During the early stages of World War II, GSI was exploring ways of using their oil exploration technology for submarine detection. This prompted a massive shift towards developing defense electronics. By around 1951, the defense electronics division of GSI was growing faster than the original geophysical division. A resulting re-org resulted in the birth of a new company called Texas Instruments, as we know it today.

TXN was at the forefront of the first ever integrated circuit or IC chip ever developed, which revolutionized the semiconductor industry. This eventually led to the development of the first hand-held calculator based a single-chip microprocessor. TXN is also credited with the development of a first known speech synthesizer chip which found its way into the Speak and Spell toy (picture above).

As one can see, this company has come a long way since its humble beginnings in the 1930s and is today one of the powerhouses of the semiconductor industry.

Like I said before, my first introduction to TXN was not through its famous calculators. Rather, I came across TXN while studying signal processing in my engineering studies and using one of the older versions of their Code Composer Studio IDE while working with one of their digital signal processing chipsets.

Since then, I have played around with several of their software driver components for firmware engineering development work/side projects ranging from PCIe root-complex/endpoint software pieces, A2D/D2A converters and also development boards such as the MSP Launchpad kit. As an engineer, it is easy to tell when components such as these (and the associated supporting documentation) have been designed with care and with quality in mind.

Business Breakdown

One of the first things that catches your attention when you open the investor relations page on ti.com is the following quote by their current CEO, Rich Templeton.

The best measure to judge a company’s performance over time is growth of free cash flow per share, and we believe that’s what drives long-term value for our owners.

To a serious long-term dividend growth investor such as myself, there is nothing more satisfying than reading this upfront. TXN reiterates this point in all of their presentations and company filings. To achieve this goal, the company adopts a three-pronged strategy:

  • Strong business model: divided across two primary segments: analog and embedded processing built around four competitive advantages: manufacturing and technology, broad product portfolio, diverse and long-lived positions and efficient market channels.
  • Disciplined allocation of capital
  • Efficiency: striving to maximize output from every dollar that is spent.

The business segments can be further elaborated as follows:

  • Analog: Further sub-divided into power and signal chain categories. The Power category includes products that will help customer manage power in their electronic devices. The portfolio includes battery-management systems, power switches, regulators. The Signal chain category includes products such as data converters, clocks, amplifiers etc. It is therefore, not at all surprising to see TXN’s battery charger and DC/DC converter components in teardowns of smartphones such as iPhone.
  • Embedded Processing: In TXN’s own words, these are the digital “brains” behind the electronic equipment. Products in this portfolio can range from low-cost simple microcontrollers to complex motor controller systems.

Per the numbers in 2020, Analog is responsible for about 75% of sales, with Embedded Processing contributing about 18%. The remainder of the sales are classified in the “Other” segment which includes calculators and custom ASICs (application specific integrated circuits).

Also, per the latest available 10-K, here is a table denoting the markets for each of the products manufactured by TXN specified in decreasing order of revenue.

As one can see, Calculators (atleast as of 2020) accounts for no more than 2% of TI’s revenue. More importantly, you can see what the management really means by “broad product portfolio” as a competitive advantage when you see the above table. TXN has its tentacles spread in several sectors in the market! And none of these sectors are going to be irrelevant atleast in my lifetime.

I wanted to look at the revenue trends across the two main segments for the last 10 years.

So Analog segment’s revenue has been consistently growing, while the Embedded Processing was increasing during the first 5 year period but has since been decreasing. This does not concern me in any manner, and I think TXN should be investing in both these segments rather than becoming a one-trick pony and only focusing on analog semiconductors.

Dividend History

TXN is one of the popular names in the dividend growth investing community. Lets take a look at the dividend history to see why.

I borrowed the above graph from one of the recent company presentations. If you look at this graph, it is not at all surprising to see why this stock gets so much love in the dividend investing community 🙂

TXN, at the time of writing this, is yielding about 2.44% (annual dividend of $4.60). They have been increasing their quarterly dividend for nearly 16 years, with a 3-year, 5-year, 10-year dividend CAGR of 16.98%, 20.75% and 22.35% respectively. The last increase to the quarterly dividend was announced during Sep. 2021 and was about 13%.

Seriously, can anyone tell me what is not to like here?

Financial Performance

The central question that a dividend investor is interested in is how safe is the dividend in the long run. To answer this, I look over the company’s financial statements to decipher the following:

  • Is the company’s revenue growing?
  • How profitable is the company?
  • What are the company’s assets and how much does the company owe in the short-run and the long-run?

Analysis over the last 10 years show that total revenue has remained largely flattish. But what is interesting is that net income (and consequently net margin), during the same time period, has increased. The median net margin over the last 10 years has been around 22%. The last 5-yr average for net margin is about 31%.

I wanted to take a closer look at the free-cash-flow numbers. From the company’s slide-deck, I found this out:

This is exactly the kind of trendline that a long-term investor would like to see for Free-cash-flow growth, nice and consistent and TXN has been doing this for the last 16 years. In addition to the net-income growth, it appears that TXN has also been focusing on capital expenditures wherever feasible, thus sticking by one of the stated competitive advantages regarding efficiency.

TXN has a rock-solid balance sheet, with cash and cash equivalents effectively covering whatever the company owes as short term liabilities. And the long-term liability also does not look concerning whatsoever.

I also wanted to take a look at the total shares outstanding to see if the management has been focusing on share buybacks.

In this case, we want to see if the number of shares outstanding has been reducing and as we can see, during the 16 year period starting from 2004, management has been focused on share buybacks, thus using capital effectively and also providing value to the shareholders. Put this in perspective of the dividends paid and cash returned per share during the same time period has seen an annual growth of nearly 17%. Quite staggering!

My final comparison is w.r.t overall performance versus the S&P 500.

For this estimation, the comparison was performed against SPY which is an ETF that tracks the S&P 500 index and the chart computes how an amount of $10,000 would grow from 1995 to present day. TXN comfortably outperforms the S&P 500 during this period. FWIW, I performed the same test without dividends re-invested and the numbers were fairly similar.

Future Outlook

TXN has stated that it is focusing on building a third wafer fab for its 300mm analog product line in Richardson, Texas. Generally, the construction of a fab is a capital intensive exercise, so I will be keeping a close eye to see how this impacts the free-cash-flow generation in the next few years. Given that the management sees this as a move to support demands for the next three years, I think this is a positive move. In addition to this, in October 2021, TXN completed its acquisition of Micron Technology’s 300mm semiconductor factory in Lehi, Utah. So I see TXN well positioned to meet demands for next few years.

I am fairly confident about the safety of the dividend in the coming 5-10 years atleast.

Risks & Market Characteristics

  • Competitive Landscape: It may sound obvious, but it is worth re-stating that the semiconductor industry is fiercely competitive. TXN is no different, as it faces and will continue to face competition from semiconductor suppliers from different geographies (particularly Asia). For this reason, they need to consistently re-evaluate their landscape, spend on R&D and innovation and defend their market share aggressively.
  • Semiconductor cycle: TXN outlines this in one of their investor slide decks, simply stated: this refers to the ebbs and flows of supply and demands in this industry resulting in building and depleting of inventories. We had one such ebb very recently when the semiconductor shortage due to surge in demand and the inability of the manufacturing capacity to keep up with this. TXN tries to safeguard against this by understanding the customer demands and managing inventories accordingly. However, it is worth noting that this can have an impact on the overall revenue numbers.
  • TXN has stated that due to the nature of the market and associated seasonality, they typically expected the first and fourth quarters of the year to be weaker than the other two quarters.
  • Hiring and retaining top talent: This may sound like a no-brainer, but this is especially critical for the analog semiconductor industry. Top talent and management are not easy to find and replace in this domain.

Valuation

I used the Discounted Cash Flow valuation model to estimate the intrinsic value for this business. For my estimation, I used analyst estimates for revenue for the next two years of $17.93b and $18.72b respectively. Based on the last five years, I assumed a average net margin of roughly 30% and net income to free cash flow ratio of about 110% (again averaged for the last five years). These numbers are fairly conservative looking at the recent trends in both FCF and net income growth. I used these to estimate the future cash flows for the next five years and then discounted them to obtain the present value of the company. Also for my estimation, based on the Capital Asset Pricing Model, I am assuming a equity rate of 9.4%. Adding in a margin of safety of around 10%, I estimated the fair value of the stock to be around $142. TXN, at the time of writing this, is trading at $190. So I am not really a buyer at these prices.

My estimation does not look way off if you look at the non-GAAP FWD price to earnings ratio (currently around 23.62). EV/EBITDA (FWD) is also at 17.98, higher compared to the 5-year average of 16.55.

While this seems slightly overvalued at present, this is one of those stocks that I will double-down on when the stock dips appreciably. Until then, I will simply dollar-cost average into this position.

Management

One of the things that the curious investor would immediately notice is that most of the management, CEO, COO, and most of the senior VPs have been with TXN for several years (20+). For instance, Rich Templeton, the CEO, joined TI straight out of college back in 1980. It is pretty awesome that the company has hired their CEO from within the organization.

I have listened to Rich Templeton talk in interviews and conference calls and kind of like the guy. It is helpful that he is an electrical engineer himself and therefore his answers are crisp, to the point, with no bull-shitting around. In a recent interview, when asked about a question on decision making, he said something very interesting:

“In our business, you will be rewarded for moving fast and correcting as you go. And if you find people avoiding mistakes, you will find people probably avoiding taking action…and that’s usually, especially in a technology business, very problematic.”

I find that comment very insightful, in the context of leading a business in a sector that changes as dynamically as the semiconductor industry. It is a valuable insight if you look at another big name in the semiconductor industry, Intel (ticker: INTC), who were sitting on their backside and executing poorly when AMD and NVIDIA were encroaching on their market share. A lot of this was, IMHO, due to poor management. Thankfully, INTC now has an engineer as its CEO and while these are still early days, the initial signs of a turn-around happening look promising.

Here is a snapshot for the reviews from Glassdoor with Rich Templeton getting a 95% approval rating. Overall reviews also look acceptable.

Summary

My analysis shows why I am very confident about TXN and its management. This company is going to be around for the next several years and if they stay true to their guiding principles of their business, they will return cash back to me, the shareholder. It should come as no surprise as to why I have TXN in the “Core” category of my dividend portfolio.

Do you have TXN in your portfolio? Does your analysis line up with what I have presented here? Please drop a comment to let me know what you think.

PS: You can connect me with on Twitter at @LifeWDividends. I am here to learn with you and from you.

Discl: Long TXN, INTC

Monthly Income Update – December 2021

First up, I want to wish all my readers a very Happy and Prosperous New Year! I hope you are looking forward to achieving your goals for the upcoming year and chalking out your own path towards financial independence. I am very excited about the upcoming year and I have a lot of plans about things to learn to further my education as a dividend growth investor. This blog is going to be a large part of this journey and I hope to use it as a medium to share and learn with all of you.

2021 was a great year in terms of my progress as a dividend growth investor, but it was mentally and emotionally draining for me and my family. The early part of the year saw non-COVID related health issues resulting in hospital visits for some of my extended family members. We had to travel out of the country due to an emergency, and had to travel back later just when the Delta-variant was peaking. December saw another such non-COVID health issue resulting in another hospital visit with some other extended family member, this time during another COVID variant at its peak (Omicron).

Thankfully, things are getting back some kind of normalcy. But the whole of last year has been a reminder regarding the importance of health and how fickle life can be.

Anyway, let us talk about something positive. This is supposed to be a monthly income update post, after all. And no better way to close the books on 2021 than to report the dividends earned during the final month of the year.

Dividend Income Received

Company/ETF (ticker)Amount
1.Aflac Inc. (AFL)$11.22
2.Church and Dwight (CHD)$2.02
3.Duke Energy (DUK)$4.93
4.The Home Depot (HD)$8.28
5.Johnson and Johnson (JNJ)$31.80
6.Lockheed Martin (LMT)$46.42
7.3M (MMM)$28.12
8.Microsoft (MSFT)$4.96
9.NextEra Energy (NEE)$1.55
10.The Southern Company (SO)$10.56
11.Target (TGT)$2.17
12.T Rowe Price Group (TROW)$5.96
13.UnitedHealth Care (UNH)$2.91
14.Visa (V)$2.25
15.ExxonMobil (XOM)$2.64
16.Realty Income (O)$10.78
17.STAG Industrial (STAG)$3.31
18.Schwab US Dividend Equity ETF (SCHD)$26.50
19.iShares Core Dividend Growth ETF (DGRO)$5.75
Total$212.13

So a total of 19 contributors to dividend income generated $212.13, a record number for my portfolio. My monthly dividend income from Dec. 2020 was about $20.14. As one can see, the YoY dividend income has grown by 10x, which is quite staggering! LMT was the largest dividend payer this month, not surprising because I heavily bought this during the last few months.

It is important to highlight this once again: this was $212.13 for which I did not even have to lift a finger. My only contribution was some upfront research in high quality companies, purchasing them at reasonable values and then ignoring all the other noise either because they will cloud my judgement or because I simply do not have the time to follow the noise (aka “news”). My goal with sharing this information is not to brag about my progress, but rather to motivate you by demonstrating the power of this strategy.

At this stage of my dividend investment journey, the growth is very much due to capital being invested from my end, rather than organic growth due to dividend increases. But based on my future projections and my conviction in the companies I am invested in, I am well on track to see the dividend snowball take effect in a few years from now.

Buys/Sells during this month

As I stated earlier, this month was emotionally draining due to family members and their health issues. I did not have time to even look at my portfolio during this time. Any remaining free time was reserved for the family in holiday activities and some much needed cheer for all of us.

During the early part of the month, I did add to my MMM position, as that was the only stock I could find at a reasonable value at that time. All the other transactions where DRIPs.

No sells during this month.

Summary

So that is a wrap on 2021. It has been a rollercoaster of an year, but I am very hopeful and excited about the upcoming year.

I will end this post with some friendly advice: spend as much time as you can with your loved ones i.e. your family and friends. Life is short and any moments you have together are just priceless and irreplaceable.

My best wishes to all of you. Take care. Stay safe and healthy!