This Dividend Stock Should Be on Your Radar

Last month, Texas Instruments (NASDAQ: TXN) continued to outperform Wall Street expectations. Fellow Fool Anders Bylund covers the numbers in more detail, but the shorter version is both a top-line and EPS beat by posting $4.12 billion and $1.26, respectively, versus expectations of $3.9 billion and $1.12.

As of this writing, shares of the company have advanced 34% year to date versus the greater S&P 500's gain of 15%. However, Texas Instruments' may be a strong stock for bargain-hunting income investors.

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For value investors, not being sexy is a plus

For value-oriented investors, Texas Instruments may be a great addition to your portfolio. First, shares currently trade at a price-to-earnings ratio of approximately 22.9 times, in line with the S&P 500 but lower than the semiconductor industry average. Texas Instruments has continued to outperform expectations and post bottom-line surprises. Last quarter the company increased EPS by nearly 30% on a year-over-year basis.

The question, then, is why is the company trading at a discount? Depressed multiples could be due to the fact Texas Instruments suffers from a "sexiness" problem. Unlike Nvidia, which can brag that its chips are on the forefront of AI, esports, or driverless cars, the bulk of TI's revenue comes from analog chips, which do things like regulate power and provide signal-chain processing. These chips don't quite inspire the same amount of fawning press, or elicit death warnings from Elon Musk, but are essential to many of the electronics we use every day.

Analog chips have the added benefit of being relatively high margin. Last quarter, Texas Instruments reported an operating profit margin of 47% in this core analog division, up from 41% last year. From an overall cash-flow perspective, the company produced $1.5 billion in free cash flow (defined as cash from operations minus capital expenditures) last quarter, a 21% year-over-year gain, and has generated $4.2 billion in free cash flow over the trailing 12 months.

Management wants to give cash back to shareholders

For income investors, producing free cash flow is only one part of the equation. What good is it to shareholders if it's being used for non-profitable expenditures or mergers, parked offshore awaiting a tax holiday, or sitting in a bank account with no plan so the CEO can brag about the size of their war chest. That's not Texas Instruments.

Management has stated, in no uncertain terms, that returning cash to shareholders is a goal. In fact, on the conference call, when referencing the dividend and repurchase authorization, Vice President of Investor Relations Dave Pahl said, "Our commitment [is to] to return all of free cash flow to our owners."

And that's exactly what the company has done: Over the trailing-12-month period, management has returned $4.3 billion of cash to shareholders -- $2.3 billion in share repurchases and $2 billion in dividends, versus the $4.2 billion of free cash flow generated.

Those figures will only increase in the immediate future. In September, the board of directors announced a dividend increase from $2 per share annually to $2.48, a 24% increase. Additionally, the board authorized an additional $6 billion in share repurchases.

There's no such thing as a free lunch

There's really no such thing as a perfect dividend stock because investing is imperfect. To be fair, Texas Instruments has risk. First, there's intense competition in its industry, specifically with Maxim Integrated Products in the analog space. However, a strong sales staff, low price points, and high switching costs discourage electronics manufacturers from changing analog-chip providers. As such, continuation is high once a design project is won.

Additionally, by returning more than 100% of free cash flow over the trailing 12 months, it's possible for cash return to slow in the event the business hits a cyclical downturn. However, the bulk has been in the form of share repurchases. Dividends are less than half of the cash return during this period and are highly likely to continue even if the industry experiences a rough patch. The company has roughly $3.4 billion of cash as well, which can be tapped in the event of operational decline.

However, it's likely that demand for chips will continue to be high, especially in the event the Internet of Things takes shape and provides tailwinds to the entire semiconductor industry. It may not be as sexy as Nvidia or other chip manufacturers, but for value-oriented income investors, Texas Instruments may be stock to put on your watchlist.

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Jamal Carnette, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nvidia. The Motley Fool has a disclosure policy.

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