Texas Instruments Dividend: 'As Stable as It Gets'

Brian Colello: Texas Instruments has one of the most attractive dividends in the tech sector. They recently raised it to $0.62 per share per quarter, up from $0.50 a year ago. We think the dividend is secure and see no signs of TI's dividend growth slowing down.

TI is an excellent free cash flow generator and, as important, has been especially public in its desire to return 100% of free cash flow to shareholders via dividends and buybacks.

For the past few years, buybacks have exceeded dividends, but TI would have no problem reducing buybacks in order to maintain or grow the dividend even further. Again, we think this dividend is about as stable as it gets.

On the business front, the company is firing on all cylinders. Healthy growth in analog chips going into industrial and automotive applications, all while generating gross margin expansion. We think TI made some really shrewd investments in manufacturing capacity during the credit crisis, and they are now reaping the benefits as it fills these factories.

We think TI has a wide economic moat. We think the firm has intangible assets around proprietary chip designs, products, breadth, and quality that few firms can match. They also benefit from customer switching costs, so that as a customer selects a TI chip for a given device, it is cost-prohibitive to switch to a competitor, so TI tends to retain that socket for the life of the device.

The greatest business risk for TI would be a severe economic downturn, similar to the credit crisis, if chip orders were to dry up. But even in that scenario, we really like this management team and doubt the company would slash the dividend. We fully expect TI to be able to weather any economic storm.

We recently raised our fair value estimate for TI to $86 per share, so we view the stock as slightly overvalued today, but we'd be enthusiastic buyers if there were ever a pullback.