February has come and gone. I have been quiet on the blogging front as most of my family has been under the weather for a major part of this month. If you have lived in Texas, you would have heard a lot of the locals complain about allergies all the time. I didn’t think much of it for the first few years of my stay here. But since the last three years, I have observed the sudden onset of asthma-like symptoms typically around the February and March time frame. Some reading up and voila! Turns out my symptoms are due to pollen from oaks and certain types of grass. I think I and my family are past the worst phase of these allergies and are looking forward to some beautiful spring weather.
Of course, I have been keeping a close eye on the markets and the earnings reports that have been rolling in. 2023 has been a rather busy month as far as dividend hikes. Per a statistic that I read somewhere (sorry, forgot to bookmark the source), there have been almost 200 dividend hike announcements in 2023 in the US, with an average hike of 11.7%. Among these dividend hikes, 76 of these have been double-digit hikes! Wow! Not a bad time to be a dividend growth investor, eh?
I had my share of dividend hikes as well. I received 10% hikes from PEP, HD and NEE. I received a lousy 1.7% dividend hike from TROW. While disappointing, I completely understand the reasoning behind the low hike. Another not-so-surprising lousy hike came from MMM, another 1c dividend hike. O hiked their monthly dividend by 2.4%.
I also received a massive 65% dividend cut from INTC. There is so much to say on this subject, explaining what I intend to do with my position in INTC. I’ll reserve my thoughts for a near-term future post.
Lets get into the numbers for the portfolio did during this last month.
Dividend Income Received
Sl. No.
Company / ETF (ticker)
Amount
1
Apple (AAPL)
$5.08
2
AbbVie (ABBV)
$21.77
3
Albertsons Companies (ACI)
$2.54
4
A.O.Smith (AOS)
$1.20
5
Caterpillar (CAT)
$3.64
6
Clorox (CLX)
$53.32
7
Costco (COST)
$3.62
8
Procter and Gamble (PG)
$23.20
9
Texas Instruments (TXN)
$88.66
10
Verizon (VZ)
$47.96
11
Realty Income (O)
$25.41
12
JP Morgan Equity Premium Income ETF (JEPI)
$5.32
13
STAG Industrial (STAG)
$4.02
Total
$285.74
So a total of $285.74 in terms of monthly dividend income from 13 companies and/or ETFs. At the same time last year, I earned a total of $148.28 in monthly income. In Feb 2021, I earned a total of $12.86 in monthly income. So the YoY growth is appreciable, albeit expected at this stage of the dividend portfolio.
My largest dividend payer for this month has been TXN. TXN has also been in the news, with an announcement earlier this year than the existing CEO, Rich Templeton, will step down on April 1 after a 19-year tenure, and be replaced by Haviv Ilan, the current COO. I looked into the background for Haviv Ilan and was happy to see that he also comes from an engineering background and is also a straight talker, similar to Rich Templeton. It remains to be seen how Haviv will be able to steer this ship in the coming few months.
I also received from my first dividend payment from AOS, a relatively recent addition to my portfolio.
Buys and Sells during this month
No sells during this month.
As far as buys, I continued adding to my position in VZ. While I do not see huge revenue growth in the near future for VZ, the position is serving as a bond-proxy in my portfolio and I could use the output cash flows from this position to fund other positions.
I also added small tranches of JNJ and UNH to my portfolio. JNJ was trading around the $155 mark when I bought my tranche. I am cognizant of the impending litigation risk with JNJ, but there are a few things with JNJ that I need to look into beyond this. JNJ is now slated to be a pure pharma and medical devices company, and I am concerned with the relative softness in their pharma development pipeline. In addition, JNJ has also gone through a recent CEO change and the new CEO is a bit of unknown quantity to me. So I am in wait-and-watch mode on this one as I study their latest annual report and re-evaluate my thesis around this position.
Portfolio Thoughts
After selling out of CHD and DGRO last month, I have been looking at other positions in my portfolio and re-evaluating my investment thesis for these positions.
“This is our big short right now,” Chanos said in an interview with the Financial Times. “The story is that although the cloud is growing, the cloud is their enemy, not their business. Value is accruing to the cloud companies, not the bricks-and-mortar legacy data centers.”
This comment caused me to revisit my thesis and I have to admit that Chanos does have a very valid point. DLR’s FFO has not grown at all over the last few years. A similar trend is seen with Free Cash Flow as well. While the legacy data centers will not go obsolete immediately, this opened my eyes towards the reality that these data center REITs should be viewed as slow-growing mature businesses rather than fast-growers, as one might be led to believe looking at the cloud growth. I will continue doing my research into this business and determine what I need to do next with this holding.
Summary
Feb is in the books and I am looking forward to March which is expected to be a big dividend paying month for my portfolio. While I keep counting the dividend checks, I am also planning to read through a bunch of annual reports.
I recently read through PEP’s annual report and posted my findings in this twitter thread.
$PEP, one of the "core" stocks in my dividend portfolio, recently released their Q4 results. I wanted to dive into their recent annual report to look for some interesting trends.
For this dive, I looked at the period between 2013-2022.
Before ending this post, I wanted to share an interesting passage I read from Berkshire Hathaway’s 2022 Annual Report. Quoting Warren Buffet on his investment in Coke:
“The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million. Growth occurred every year, just as certain as birthdays.”
As a dividend growth investor, if you ever need reaffirmation regarding if dividends matter, I recommend you read this statement every once in a while 🙂
Buffet has admitted that his own investing style is a mix of teachings from Ben Graham and Philip Fisher. I have already read the Intelligent Investor and Security Analysis multiple times and I am sure to read these several more times in my investing journey. However, I have never read Philip Fisher. The book was first published in the 1950s, so before even picking up this book, I had a sense that some of the observations may be dated. But I wanted to take a look anyway.
Before we get into the book itself, I wanted to first explore a little more about Philip Fisher, the person behind the book.
Who is Philip Fisher?
Fisher made his humble beginnings as a dropout of the then newly created program/school Stanford School of Business Administration in 1928, to start working as a security analyst. He started his own investment firm called Fisher and Co. in 1931 and remained at the helm till his retirement in 1999. Immediately after starting his firm, due to the advent of World War II, he was forced to take up several desk jobs at the US Army Air Force. He used this opportunity to research and refine his own investment philosophy which he later put into practice after the end of the war.
I could not find a whole lot more information about him through the interweb beyond what he mentioned in his book and also what his son, Kenneth Fisher, has mentioned in the preface. He was known to a very private person, not known to give a lot of interviews. However, after publishing this book, he rose to prominence. Per what I have gathered reading around the internet, Fisher and Co. had a very small number of selected clients who were able to secure attractive returns using Phil Fisher’s approach. Today, he is widely regarded as a pioneer of growth investing and recognized by Morningstar as one of the greatest investors of all time.
Phil Fisher was one of the early proponents of the “buy and hold” strategy. To stress this point further, one of his most successful investments was a purchase of Motorola, which he bought in 1955 and held until his death in 2004. His other investments were Texas Instruments, a stock that I currently hold in my dividend portfolio, Dow Chemicals and so on.
During the later half of his life, he began suffering from dementia and/or Alzheimer’s disease and he ended up selling all of his holdings except for Motorola. Per his son Kenneth Fisher, he would never have sold his investments had he been of sound mind or his younger self and his investment returns would have looked much much better as a result. Fisher was known as a strong supporter of companies that would invest in research and development and a master at evaluating companies in the tech sector. This was a good 50 years before the advent of Silicon Valley.
Lets get into the book itself.
Book Dedication
The book starts of with a rather interesting dedication. Let me quote it here:
This book is dedicated to all investors, large and small, who do NOT adhere to the philosophy: “I have already made up my mind, don’t confuse me with facts.”
I paused after reading that statement because there is an interesting paradox. At times, as investors (and perhaps as individuals) we can be very closed-minded and not as receptive to opposing viewpoints. Maybe it is with the understanding that having a conflicted mind can impact our investing philosophy and mess with our heads. This trait can be good but it can also be bad as it stunts our learning process. It takes a strong mind to be open to counter viewpoints and somehow let that organically grow one’s own investing mindset.
Scuttlebutt technique
One of the strategies that Fisher repeatedly uses to evaluate businesses before deciding to buy them is coined as “scuttlebutt”. What does this mean?
Fisher recommends that in addition to studying a company’s financial statements, a wise investor can learn a lot more about any given company through the following avenues:
By going to five companies that are competitors and asking them intelligent questions about the strengths & weaknesses of the other four. Fisher claims that, more often than not, this approach will give the investor a surprisingly detailed and accurate picture of the overall landscape of the sector and the business itself.
By questioning vendors and customers that directly interact with the company.
By questioning research scientists who rely on products manufactured by this said company.
By questioning former employees of the company. Although, Fisher cautions about using this input with a pinch of salt as there could be bias in opinions here.
Fisher admits that while a typical retail investor may not (or cannot) have the leverage to go on such fact-finding missions, he/she can use these as a yardstick when choosing a professional advisor that can help them with such analysis.
With the scuttlebutt technique as the baseline, Fisher recommends the following 15 principles to look for in a stock before investing in them:
Does the company have products or services with sufficient market potential to make possible a sizeable increase in sales for atleast several years?
Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?
How effective are the company’s research and development efforts in relation to its size?
Does the company have an above average sales organization?
Does the company have a worthwhile profit margin?
What is the company doing to maintain or improve profit margin?
Does the company have outstanding labor and personnel relations?
Does the company have outstanding executive relations?
Does the company have depth in its management?
How good are the company’s cost analysis and accounting controls?
Are there other aspects of the business, somewhat peculiar to the industry involved, which will given the investor important clues as to how outstanding the company may be in relation to its competition?
Does the company have a short-range or long-range outlook in regard to profits?
In the foreseeable future will the growth of the company require sufficient equity financing so that the large number of shares then outstanding will largely cancel the existing stockholders’ benefit from this anticipated growth?
Does the management talk freely to investors about its affairs when things are going well but “clam up” when troubles and disappointments occur?
Does the company have management of unquestionable integrity?
For a book that was published more than 60 years ago, I am amazed to see that so many of these principles are timeless and very much applicable even today. Fisher admits that it is unlikely that one would find a company that would meet all 15 of these principles, but he recommends to avoid companies that do not pass several of the above.
Selling Out of Positions
After going through all the research and investigation on what to buy and when to buy, an investor would naturally be curious about when to sell to gather profits. For this, Fisher states the following:
If the job has been correctly done when a common stock is purchased, the time to sell it is – almost never.
Evidently, Fisher is a supporter of the philosophy or buying and holding. He goes into several reasons why investors choose to incorrectly sell out of their positions. I particularly liked the discussion on selling out when the investor believes a stock is overvalued/overpriced:
This brings us to another line of reasoning so often used to cause well-intentioned but unsophisticated investors to miss huge future profits. This is the argument that an outstanding stock has become overpriced and therefore should be sold….Before reaching hasty conclusions, let us look a little below the surface. Just what is overpriced? What are we trying to accomplish? Any good stock will sell and should sell at a higher ratio to current earnings than a stock with a stable rather than an expanding earnings power…All of this is trying to measure something with a greater degree of preciseness than is possible. The investor cannot pinpoint just how much per share a particular company will earn two years from now…As a matter of fact, the company’s top management cannot come a great deal closer to this .. Under these circumstances, how can anyone say with even moderate precision just what is overpriced for an outstanding company with an unusually rapid growth rate?
I found this discussion particularly interesting and revealing. Valuing growth stocks, especially the ones that are early in their growth trajectories, is incredibly hard. Even top-investors like Warren Buffet, Mohnish Pabrai and the likes in various interviews have stated how they have tossed such opportunities in the “too hard” basket.
Dont’s for investors
Fisher goes into several dont’s for investors. I will cover some of the ones that I thought were interesting:
Don’t buy into promotional companies.
Don’t overstress diversification.
Don’t be afraid of buying on a war scare.
Don’t fail to consider time as well as price when buying a true growth stock.
Don’t follow the crowd.
Again, several of these dont’s are just as applicable today as they were when this book first came out. I wanted to expand on the second point regarding diversification here. Fisher states the following:
The horrors of what can happen to those who “put all their eggs in one basket” are too constantly being expounded. Too few people, however, give sufficient thought to the evils of the other extreme. This is the disadvantage of having eggs in so many baskets that a lot of eggs do not end up in really attractive baskets, and it is impossible to keep watching all the baskets after all eggs get put into them.
So clearly, Fisher believed in having a concentrated portfolio rather than diversifying among several sectors/industries. I have previously written about this subject stating why I disagree with this philosophy. There is a sea difference between the business acumen that the likes of Fischer, Buffet and Munger possess in comparison to an average retail investor such as myself. Diversification is a protection against this shortcoming and if performed as a part of a specific strategy, also provides a great defense in a various economic environments. A risk-averse investor would want to safeguard his invested capital and diversification is one way to achieve this.
Other writings
Part 1 of this book covers the subject of Common Stocks and Uncommon Profits. Parts 2 and 3 cover some of Philip Fisher’s other writings dealing with subjects regarding “Conservative Investment” and details on how Fisher went about developing his investment philosophy over the course of his life. I will cover the other two parts in greater detail in a future post on this blog as they are very important topics by themselves.
Overall thoughts regarding this book
Peter Lynch, another investing legend, once stated that investing needs to be a fine mix between science and art and that an astute investor will ensure that there is a proper balance maintained between both facets. If this balance is lop-sided in either direction, it could lead to a bad decision. I get a sense that while Buffet relies on Graham’s teachings for the “science” side of his investment philosophy, he chooses to rely on Fisher’s teaching for the “art” aspect of his investments.
In comparison to Graham’s books, I found the writing style in this book was very easy to follow. In that regard, I found the book to be more amenable to a beginner investor. Although the subject is mostly focused around picking growth stocks, I could see the same principles being used for evaluating dividend growth stocks and/or value stocks as well.
Some of the techniques mentioned in the book are just as well applicable to this day and age. I use an “indirect scuttlebutt” strategy in my analysis, where I look at the interviews of the CEOs (or other members of the board/management) for companies that I am interested in. If I can see consistency in responses and clarity of thought, that is usually a good sign. But if I detect BS in the responses, that is a massive red flag. I also read through forums, talk to technicians/consumers to see what they think of the products coming from a company which I am considering to invest in.
My only critic is that the writing at times appeared to be very dry. I could see some interesting parallels with the ideas discussed in Peter Lynch’s books, but in comparison Peter Lynch has a knack of keeping the reader engaged with his humor. I would have also liked to see more examples, potentially with graphs to accompany the discussion surrounding profit margins, cost of research vs size of the company etc. But some of these are very minor critics.
Overall, this is a great book and something I will re-read in the future.
Have you read this book? What were your takeaways? Please drop a comment below.
Time for a monthly dividend income update post. Before I start though, I wanted to drop a note regarding the current situation in Eastern Europe. It is difficult to remain focused and talk about things like personal finance and related topics when there is so much turmoil due to a war-like situation. My prayers are with the people of Ukraine and I hope that sanity prevails.
As far as my life, things are extremely hectic. Work is busy as usual, but our family has a whole are busy during the week with various activities. While all of this is going on, I have not even been paying any attention to the market. In fact, preparing for this blog post forced me to open my portfolio and see what was going on! No surprises there, no drastic drops etc.
Lets dive right into the update then.
Dividend Income Received
Sl No.
Company / ETF (ticker)
Amount
1.
Apple (AAPL)
$2.20
2.
AbbVie (ABBV)
$19.96
3.
Albertsons Co. (ACI)
$1.20
4.
Caterpillar (CAT)
$1.12
5.
Clorox (CLX)
$40.42
6.
Procter & Gamble (PG)
$8.74
7.
AT&T (T)
$2.12
8.
Texas Instruments (TXN)
$34.55
9.
Verizon (VZ)
$23.13
10.
Realty Income (O)
$11.37
11.
STAG Industrial (STAG)
$3.47
Total
$148.28
So a total of 11 companies contributing to the final monthly income of $148.28. At the same time last year, I earned a grand total of $12.86. So that represents an YoY increase of nearly 1053%! While that is great, I do realize that such growth is expected at this relatively early stage of my dividend growth journey. I am also trying to track the percentage of my dividend income earned through shares bought via DRIP strategy (i.e. purely organic growth as opposed growth through the capital I am investing). Unfortunately, it is a little tricky since I was initially using M1 Finance as a brokerage early last year which does not have a traditional DRIP service available like with the big-house brokerages like Fidelity (my current brokerage) or Schwab. M1 uses a pooled-dividend strategy. It is something that I need to put some further thought.
My largest dividend payment came through Clorox closely followed by Texas Instruments. Both are top-tier companies in the my portfolio allocation strategy. I am especially interested in Texas Instruments at present, especially considering the situation in Eastern Europe and its impact on the semiconductor industry.
Buys and Sells
No sell activity during this period.
As far as buys, I added to my following existing holdings: Texas Instruments, T Rowe Price Group and Whirlpool. These were larger tranches weighted in accordance to the category of the portfolio.
I also add a smaller tranche of Clorox, mostly because I believe in this business and the quality of the products. I think the dividend is safe and I do not see this company going away soon, atleast in my life-time. The other company that I was tempted to buy but resisted was 3M (ticker: MMM). With this one, while the current dividend is safe and the stock is attractively priced, I am not sure about the growth prospects in the near term. I am also paying close attention to how the management is going to wade the company through these troubled waters in the next couple of years. This will go a long way in terms of my belief in the company and its overall growth prospects. So far, it has been a mixed bag and hence I am circumspect.
Summary
Another month is in the books. I am chugging along in my dividend growth investing journey and staying invested even in these turbulent times in the market. What about you? How did your month go? Are any of the companies listed above in your portfolio as well? What are your thoughts? Please drop a comment and let me know.
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.
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:
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 findpeople 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.
September of 2021 is already here! I cannot believe how quickly time is flying by. I am incredibly busy at my regular day-job and then with family after that, leaving literally no time for even looking at my dividend portfolio. Is that a problem? No! This is precisely the reason why I have chosen an investing strategy that does not require regular baby-sitting. I do the one-time deep analysis on a business and if everything checks out and I get to buy the business at a reasonable value, I invest in it. And then I sit and wait for this seedling to grow into a plant and eventually a tree. These businesses will return cash back to me as dividends. Along the way, they will also increase that cash since they are making more money than they need, and they choose to return the excess cash back to their shareholders as a thank-you.
The following companies that I invest in, have increased their dividends in the past month:
Microsoft (ticker: MSFT): The board of directors at Microsoft Corp. declared a increase in their quarterly dividend, with the new dividend at $0.62 per share. That is a 11% increase in their quarterly dividend. MSFT has been increasing their dividends for the last 11 years. Their 5-year dividend CAGR is about 9.24%. In addition to the dividend increase announcement, the board also approved a share repurchase program for $60 billion.
Texas Instruments (ticker: TXN): TXN’s board of directors approved a quarterly dividend increase of nearly 13%, going from $1.02 to $1.15. TXN has been increasing its quarterly dividends for the last 18 years. The dividend increase is slightly lower than the stunning 5-year CAGR rate of 21.83%. But I am not at all worried because the company, its CEO and the board are committed to their shareholders.
Realty Income (ticker: O): O’s board of directors approved the 112th common stock dividend increase. The monthly cash dividend increased from $0.2355 to $0.236 per share. This may look like much, but considering this is a monthly payer, I will take it. The CEO and President Sumit Roy said the following, “Our Board of Directors has once again determined that we are able to increase the amount of the monthly dividend to our shareholders, marking the 112th increase since our company’s public listing in 1994. With the payment of the October dividend, we will have made 615 consecutive monthly dividend payments throughout our 52-year operating history.” Lets just digest that last part again: 615 consecutive monthly payments! Steady as they go!
Do you own any of these stocks? Did you receive dividend increases through your other holdings? Please let me know in the comments below.
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