From Bob Ciura: Investors looking for dividend stocks should take a closer look at the technology sector. This may come as a surprise recommendation, since the tech sector has not typically been a good source of dividend stocks. But a lot has changed in recent years.
The bad memories of the 1999-2000 tech bubble may scare investors away from tech stocks, but America’s tech industry has come a long way since then. Large-cap tech blue chips are no longer the speculative bets they used to be. Many are very large, well-established companies that generate huge free cash flow and hold excellent balance sheets.
Hidden Tech Stock is a Gem
Texas Instruments probably flies under most investors’ radars. It does not get much coverage in the press. But this hidden tech stock is very worthy selection for dividend investors, because it generates huge amounts of cash and management is committed to returning 100% of free cash flow to investors through dividends and share repurchases.
Texas Instruments has increased its dividend for 12 years in a row and has reduced its shares outstanding by more than 40% since 2004.
Texas Instruments is highly profitable. Last quarter, the company posted earnings per share of $0.76 per share, which was a 17% year over year increase. Total revenue increased 1.3% to $3.27 billion for the quarter. The company beat analyst expectations on the top and bottom lines. On average, analysts had expected $3.2 billion of revenue and $0.73 per share of earnings.
Texas Instruments’ stock jumped after last quarter’s earnings, and its performance over the past several months has been very impressive. The stock has is up 27% year-to-date, a far better return than the S&P 500.
The main reason why Texas Instruments’ stock has performed so well is because it is rapidly growing revenue and earnings, thanks to its decision to focus on its core strategic initiatives.
This Stock’s Unique Advantage
Texas Instruments generates a lot of free cash flow, and since it does not have a lot of debt to worry about, its cash is piling up on the balance sheet. At the end of last quarter, the company held $2.5 billion in cash, equivalents, and short-term investments on the balance sheet.
In addition, Texas Instruments has a unique advantage over most other tech stocks, which is that 80% of its cash on hand is held within domestic entities. Consider that many other technology stocks hold the majority of their cash overseas. Those companies cannot reach that cash without facing a stiff repatriation tax.
Texas Instruments has no such impediment, and as a result investors can expect the company to continue its streak of dividend growth and increasing share buybacks.
Shift in Focus Pays Dividends
A few years ago, Texas Instruments decided to sell off certain businesses that were not growing, and at the time were deemed unessential for the future strategy of the company. One particular area the company got out of was its legacy wireless business.
In turn, the company decided to steer future investment toward analog and embedded processing, where it felt it held the strongest competitive advantage. For example, Texas Instruments has a long-standing policy in these businesses to acquire manufacturing assets as cheaply as possible, to maximize return on invested capital.
Today, analog and embedded processing represent more than 80% of Texas Instruments’ total revenue. This strategy shift is paying off for the company. As of last quarter, Texas Instruments’ trailing 12-month free cash flow rose 7% to $3.9 billion.
Dividend Growth Ahead
Texas Instruments stock has a 2.2% dividend yield, which is slightly above the 2% average dividend yield of the S&P 500. And, future dividend growth is highly likely, as the company is highly profitable, and holds most of its cash in the U.S.
The hidden tech stock might go relatively unnoticed in the tech sector, but investors looking for a solid dividend growth pick should take a closer look at Texas Instruments.
This article is brought to you courtesy of Wyatt Investment Research.