Texas Instruments, dividend not enough. Focus on factories

In every financial presentation there is always some table more interesting than the other. So it is also for Texas Instruments. The long-established US semiconductor company recently set out its strategy in a document called 'capital management'.

Well: the company, in two graphs, shows the dual dynamics of dividends and the number of outstanding shares. In the first case, Texas Instruments started with a coupon of $0.09 per share in 2004 and rose to over a dollar in 2013. Subsequently, the 'dividend per share' gradually increased to $5.2 last year. The weighted average annual increase over the past decade is around 17%. At the same time, the second table shows the decline in outstanding shares. A dynamic which, on the one hand, has helped - in the wake of the same robust buy backs - the very increase in the coupon per share; and which, on the other, has resulted in a 47% contraction in outstanding shares. In short, despite being a hi-tech company, the numbers are unequivocal: Texas Instruments has based (and bases) an important slice of its appeal on the dividend. The characteristic, moreover, jumps out from the share price trends on the stock exchange. According to the Bloomberg terminal, the company's simple performance over the past year (closing on 29/3/2024) is up 7.2%. The total return, on the other hand, i.e. the performance with the dividend reinvested in the share, is up 10.6%. Not only that. Over the longer term (5 years), a period of time more suited to assessing the impact of the dividend, the difference between the two performances widens further: the simple dynamic is worth 52.1% growth. The total return, for its part, is up 74.8%.

Everything smooth as silk, then? The reality is more complex. The company has started to increase capital expenditure to support industrial growth. Specifically, is the indication, the group between 2023 and 2026 expects to have about USD 5 billion per year of Capex (USD 5.3 billion last year). A significant effort that negatively impacts the so-called free cash flow (Fcf). That is: the amount of money a company has available after paying all the expenses necessary to keep the business running and after investing in assets such as equipment or infrastructure. This is the 'cash' also used to pay coupons. In 2023, the indicator dropped to USD 940 million. A trend that - is the indication of several experts - risks calling into question the continued growth of the coupon amount. True! The latter can be financed in various ways. And yet - the analysts retort - the sound management of it would be undermined. Until 2022, the increase, and payment, of the dividend was sustained, and financed, efficiently precisely by virtue of increasing free cash flows. In 2023, on the other hand, the total coupon exceeded the Fcf. Should the condition persist, some operators warn the investor. All the more so, at a time when the increase in Capex threatens to place limits on buy backs as well. In other words: the group's desire to push on investments in the production base may give rise to doubts about the continued expansion of the dividend policy. Texas Instruments, for its part, does not seem to share the fear and says the dividend for the second quarter of 2024 will be $1.30 per share. Bloomberg, then, predicts that the third and fourth ex-dividend will be worth $1.3 and $1.36 per share, respectively. That is to say: the predicted reduction, in fact, may not be there. And yet, the warning must be heeded.

So far, some coupon and cash flow considerations. What, however, is the trend in the income statement? In the first quarter of 2024, Texas Instrument reported revenues of USD 3.66 billion (-16% compared to the same period in 2023). Net profit, on the other hand, stood at 1.1 billion (1.71 billion in Q1 2023). The share price, despite the bad data, nevertheless shot upwards. A paradox? The answer is negative. The market, already aware of the negative quarterly performance, had expected even worse accounting numbers. Hence, the positive reaction on the stock market.

The trend, however, various experts argue, is a short-term effect. On closer inspection, the stock - which has underperformed the benchmark index over the past year - must also be supported by elements - especially fundamentals - of a broader scope if it is to continue to rise. On this wavelength, investments to expand production and increase profitability come into play. Disbursements that are part of a strategy whose real understanding requires, first of all, recalling the company's corporate purpose.