Morningstar | Texas Instruments' Capital Allocation Policies Remain Best in Class; Maintain $106 FVE
We will maintain our $106 fair value estimate for wide-moat Texas Instruments after the company provided investors with its annual update on its capital allocation policies and future plans. The company maintained most of its targets that continue to make TI a best-in-class allocator of capital and a firm worthy of our Exemplary stewardship rating. TI's primary capital allocation targets continue to be free cash flow generation of 25%-35% of trailing 12-month revenue (TI earned 38% in 2018), as well as a goal to distribute 100% of such free cash flow to shareholders (40%-60% of which will be paid out via the dividend). The only notable update to TI's long-term targets is the revised expectation to spend 6% of revenue on capital expenditures, up from the firm's prior goal of 4%, as the company expects to buy a greater proportion of new, rather than used, equipment in its upcoming factories (and likely because fewer chipmakers have gone bust and have needed to sell equipment at liquidation prices than in years past).All the while, TI remains focused on producing higher-margin analog and embedded chips and selling those chips into lucrative end markets, such as the automotive and industrial sectors. TI noted that industrial and auto chip sales were 56% of total revenue in 2018, up considerably from 42% in 2013. Further, among the 36% of revenue coming from industrial, TI has 13 different subsegments within this end market, none of which makes up more than 5% of revenue, thus sheltering TI a bit from heavy leverage into a single product or end market category like aerospace and defense or factory automation.
Another noteworthy data point, in our view, was TI's disclosure that products built at 45 nanometers and lower make up about 15% of revenue but are outsourced to foundries. Like many analog chipmakers, the other 85% of revenue coming from lagging edge chips enables TI to be relatively less R&D intensive than digital chipmaking peers and allows the firm to generate healthy cash flow going forward.
Texas Instruments designs and makes semiconductors that it sells to electronics designers and manufacturers. The company has two reportable segments: Analog and Embedded Processing. The company's analog semiconductors change signals, such as sound, temperature, pressure or images to a stream of digital data. The company's analog segment primary product lines includes: power, signal chain, and high volume. The company's embedded processors are designed to handle specific tasks and can be optimized for various combinations of performance, power and cost, depending on the application. The company's embedded processing segment primary product lines includes: connected microcontrollers and processors.
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