Texas Instruments Incorporated (NYSE: TXN) saw its shares rise in the after-hours on Thursday on word of a dividend hike and a monster share buyback plan. The dividend may be good for Cisco Systems Inc. (NASDAQ: INTC) and the yield may be good for Intel Corporation (NYSE: TXN), but frankly this may be the wrong path for the time being for Texas Instruments even if this is still very ‘shareholder friendly’ in the eyes of most investors.
The chip company announced that it is expanding its buyback to an additional $7.5 billion in its common stock in addition to the $1.3 billion in buyback authorizations remaining at the end of June. If there is one thing that TI has in common with Cisco Systems Inc. (NASDAQ: CSCO), it is that when it says it is going to buy shares, it does… the total amount of stock authorized for repurchase since September 2004 is now $27.5 billion, which means that TI is closing in on having shelled out $20 billion to buy down its shares. It has already reduced its outstanding shares since 2004 by roughly 533 million.
On the dividend front, the new dividend rate will go to $0.13 per quarter from a prior $0.12 per quarter rate. Based upon Thursday’s 1.3% gain to to $24.98, the dividend yield is almost 2.08% now. If you adjust for a 3% after-hours gain to $25.85 from Thursday evening, that new dividend yield is about 2.01%.
So how does this compare to other chip giants? For starters, TI had been increasing its dividend already each year. The $0.52 annualized payout compares to non-GAAP estimates from Thomson Reuters $2.47 EPS for 2010 and $2.53 EPS for 2011. In short, the company’s payout comes to nearly 20% of non-GAAP estimates. It is easy to argue against GAAP versus non-GAAP as a measure, but that is a different argument for a different time and one which 24/7 Wall Street has little chance of changing for the industry any time soon (if ever). Intel Corporation (NASDAQ: INTC) has a 3.4% yield and it pays out closer to 30% of its income.
This is certainly no complaint against TI. Hiking dividends and retiring stock is generally well received. The only issue at hand today is whether or not Texas Instruments should be considering a solid strategic acquisition at a time when many valuations are low and when cash is cheap when we are moving to a post-PC era of mobile computing. Peers are consolidating where they can.
Broadcom Corporation (NASDAQ: BRCM) is newer to the dividend game with a sub-1% yield today and its market cap is not quite two-thirds that of TI. ARM Holdings plc (NASDAQ: ARMH) has been getting much of the smartphone and mobility related press of late, and its market cap is just over one-fourth that of TI and ARM yields only about 0.5% for dividend investors. Marvell Technology Group Ltd. (NASDAQ: MRVL) has no dividend yet, and it is about 35% of TI in market capitalization.
Would TI consider going after any of these companies? Unlikely. They may be too large in size for what TI would be comfortable with, may be too spread our and/or overlapping, and frankly might be too dilutive to earnings considering that TI trades at a mere 10-times forward earnings estimates.
With an ultra-clean and lean balance sheet, TI may just prefer to keep shrinking its float. There are many companies out there with niches in defense electronics, communications, and other aspects of TI’s businesses which could be acquired in the sub-$1 billion to the $5 billion range. In a game where competitors are making acquisitions and where everyone is trying to stake out their turf for the 2010 to 2020 post-PV and ultra-mobility era, TI may want to use some of its excess cash to look for more bolt-on acquisitions that offer growth and that won’t hurt its valuations too much by dilution.
The one thing that TI shares with for Intel for ETF purposes is a more than 20% weighting of the Semiconductor HOLDRS (NYSE: SMH) ETF. TI has seen a narrow trading range over the last year of $22.26 to $27.44.
JON C. OGG
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