New Purchase: Texas Instruments

With the market falling like a rock, I was able to make a purchase I’ve been wanting to make for a while, but didn’t properly fit into my income strategy; Texas Instruments.

TXN is a semiconductor company that has a strong history and is financially very stable. While it has a relatively low yield (for me) at 3.6%, it has grown its dividend at a 22%+ compounded rate for nearly 20 years. At that rate it doubles every ~3 years making it attractive as a total return option that will pay well 5 years from now.

Valuation

For companies that grow their dividends at a rate above their cost of equity, the Dividend Growth Model is useless. Instead I headed over to finbox to get a look at their EBITDA based discounted cash flow model. For a mature company, EBITDA drives a lot of financial decisions.

With the recent decline, TXN fell into fair value territory, making it a valid option for me to pull the trigger.

Yield on Cost

I wanted to add a note on Yield on Cost. As a historical metric, I think Yield on Cost is a vanity, feel good metric. However, as a forward looking metric, it is very useful especially when comparing lower yielding, higher growing stocks versus Higher yielding, moderate growth stocks. I’ve made the tradeoff with most of my income producing portfolio to invest in Higher Yielding stocks. However, I’ve made a couple of investments into lower yielding higher, growth stocks in the last month because they are attractive at a long term projected yield on cost. Digrin does a great job of projecting out a 10 year yield on cost for TXN.

YearYield on Cost
20203.6%
20214.4%
20225.4%
20236.6%
20248.1%
20259.9%
202612.2%
202714.9%
202818.3%
202922.4%
At its current growth rate of 22.5%, within 7 years TXN will be above our target of 10% year Yield on Cost.

I may have to wait a few years to get to my regular initial ~6% threshold, but the growth of dividends is like a rocket ship making it hard to say no to investing in TXN.

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