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Semiconductor stocks of all varieties took it on the chin last year. Chip manufacturers were hit by a number of headwinds, including the rising U.S. dollar, which cut into revenue earned overseas; the prospect of rising interest rates, which threatens to elevate borrowing costs; and the prospect of slowing economic growth in critical emerging markets like China.
Texas Instruments (NASDAQ: TXN) announced a better-than-expected quarterly earnings report on Thursday, and the stock popped 3% in early trading. Investors appear to be breathing a sigh of relief that, at least for this chip company, conditions aren’t as bad as feared.
Texas Instruments has been a notable outperformer in its industry. The stock is down 5% in the past year, while the Philadelphia Semiconductor Index is down 10% in that time.
Texas Instruments owes its success and relative outperformance to a strategic shift in operational focus, which is paying off today.
Industry-Leading Results
In stark contrast to most of its semiconductor peers that are missing earnings expectations, Texas Instruments delivered a solid beat in the fiscal fourth quarter. Earnings, adjusted to exclude non-recurring items, clocked in at $0.71 per share. This exceeded analyst estimates of $0.69 per share.
However, revenue of $3.19 billion came in a little light. Expectations were for the company to generate $3.2 billion. And, the company’s guidance for current-quarter revenue was light as well. Texas Instruments expects $2.85 billion-$3.09 billion of revenue, compared to $3.1 billion expected.
Texas Instruments’ weak revenue result and forward-looking guidance are a concern, and it is clear that conditions are slowing, particularly overseas. But this is hardly news to investors who have been closely following the company. If anything, it’s a good sign that Texas Instruments has the operational flexibility to cut costs enough to keep earnings intact.
For 2015, Texas Instruments earned $2.82 per share, up 9.7% year-over-year. The fact that Texas Instruments generated nearly double-digit earnings growth in this environment is a testament to the strength of its business model and its management team.
This flexibility is due to the company’s shift in strategic focus in recent years.
Big Changes for Texas Instruments
Texas Instruments has been on a path of prolonged structural change. It has aggressively sold off business divisions that were viewed as low growth, and not critical to the future direction of the company. For example, Texas Instruments essentially sold off its entire wireless business.
Instead, Texas Instruments diverted resources to shift into higher-value businesses like analog and embedded processing. It now derives more than 80% of its total revenue from these two core industries. It also changed its capital expenditure policy. The company focused on opportunistically buying manufacturing assets on the cheap. Its remaining core businesses feature high-value assets and products, with long life cycles.
Texas Instruments: Strong Cash Generator
The end result of these initiatives is that Texas Instruments is a streamlined, more efficient company that produces excellent cash flow. Last year, Texas Instruments generated $3.7 billion of free cash flow, up 6% year over year. That represents an excellent 28% of revenue.
Looking back further, Texas Instruments has increased free cash flow by 7.5% compounded annually since 2004.
This allows Texas Instruments to return high amounts of cash to shareholders. The stock pays a hefty dividend that yields nearly 3%, and it routinely increases its divided at double-digit rates. In September, it raised its dividend by 12%. It has increased dividends each year for the past 12 years.
Not only that, but the company returns billions of dollars to investors through share buybacks. When the company increased its dividend, it also announced a new a new, $7.5 billion share buyback authorization, which was added to the $1.8 billion that was remaining on its previous share repurchase authorization. It has reduced its outstanding share count by 41% since 2004.
Texas Instruments stock is modestly valued at 18 times earnings, yields almost 3%, and is growing earnings by almost double digits in a very tough environment. The stock should be on the radar for growth, value and dividend investors alike.
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