Today, I want to tell you about a new way to judge the value of a high-tech stock. It’s especially important since it’s a great way to spot winners in a market under pressure from fears of rising inflation.
It’s called free cash flow per share. It tells you a lot about how the company is managing its profit margins because the higher those margins are the greater the firm’s free cash flow.
With that in mind, a firm that’s doubling its free cash flow per share every six years would be an investment well worth taking notice of.
And that’s exactly what I have in mind for you today with a storied and very well-run leader in the $430 billion semiconductor sector.
Even better, it’s returning a lot of that cash flow directly to investors through yearly dividend increases, with the yield now at 2.3%.
Let me show you just how price appreciation and great dividend growth make this stock such an excellent investment…
When I first arrived in Silicon Valley in the mid-1980s, dividends here were seen as an admission that the glory days were gone.
Any tech company that decided to pay dividends was seen as being so bereft of ideas, it couldn’t think of any more research and development to fund.
So, with no way to fund the next round of growth, the firms would send the money to shareholders instead. That was the conventional Valley wisdom, at least.
But all that has changed in the last decade as tech leaders piled up a steady stream of money so large there’s enough to boost R&D and pay dividends.
Long-time readers may know I call the firms that can do both Silicon Valley Aristocrats.
A stand-out feature of these tech leaders is their high free cash flow per share. Free cash flow is a measure of how much money a firm is bringing in the door to pay off debt, invest in its business, or give back to investors.
When divided by the number of outstanding shares, it gives you a very good picture of how much flexibility the company has, the odds that shareholders will be getting dividends, and whether those might keep growing.
In short, higher free cash flow per share translates into higher shareholder returns, whether through faster growth, higher dividends, or stock buybacks.
And the semiconductor leader we’re talking about today has a stellar record in this area.
Calculated Cash Flow
For the past 17 years, this company has increased its dividends every single year at a compound annual growth rate of 38%. Last year alone, the firm raised its quarterly dividend by 13%.
Despite that stunning dividend growth rate, the firm’s dividend payments accounted for just 62% of its free cash flow.
In other words, the company has plenty of room to maneuver.
The firm in question is Texas Instruments Inc. (TXN), the legendary designer and manufacturer of semiconductors and microchips.
Some may remember it best for its line of scientific calculators that kids across the developed world used in school. But the company has left a much deeper mark on the world of computing than that.
It was Texas Instruments that created the world’s first silicon transistor and the first to use it to replace vacuum tubes in a radio, both in 1954.
Over the next 16 years, the company was also first to invent the integrated circuit, the hand-held calculator, and to put all the electronics needed for computing on a single microchip.
Today, it continues to innovate in semiconductors. And its manufacturing and design processes are so efficient that 41% of its revenue for the first quarter this year was free cash flow.
Another key draw for investors, of course, is the great dividend track record I mentioned earlier.
Combine it all with the flexibility given by Texas Instruments’ huge free cash flow, and the chances of a dividend cut seem pretty remote at this point.
After all, if they were going to cut dividends they would have done so already, in last year’s pandemic-slammed economy.
The Earnings Turnaround
Now, with the Federal Reserve’s near-zero interest rate policy, there’s really not much yield out there for investors to capture.
Traditional sources of yields such as bonds, REITs, or commodity stocks don’t pay much, and often don’t have any growth prospects either.
With amazing dividend growth, plenty of free cash flow, and booming demand for its products, Texas Instruments couldn’t be more different.
A great way to boost your overall returns is to reinvest all your dividends. That way, you let your dividend growth rate compound for even higher profits.
It has to be said that in recent years, Texas Instruments hasn’t been much of a per-share earnings grower.
But that is changing. Earnings per share were up 51% in the most recent quarter. TI is now forecast to increase profits for the full year by 31%.
To be conservative, let’s cut that back by 25%. Even so, we’d still get a double in just over three years.
In short, by owning Texas Instruments for the long haul and reinvesting the dividends, you’re basically putting your portfolio on auto-pay.
And in the meantime, I’m looking at another “classic” tech company that’s ready to take the lead in a new and cutting-edge field of innovation.
And this is a field that private businesses and governments alike are falling over each other to claim a stake in, and that could be worth as much as $3.1 trillion.
But, more on that right here.
Cheers and good investing,
Michael A. Robinson