Two important questions to ask before you buy Texas Instruments Incorporated (NASDAQ:TXN) is, how it makes money and how it spends its cash. This difference directly flows down to how much the stock is worth. Operating in the semiconductors industry, Texas Instruments is currently valued at US$109.70b. I’ve analysed below, the health and outlook of Texas Instruments’s cash flow, which will help you understand the stock from a cash standpoint. Cash is an important concept to grasp as an investor, as it directly impacts the value of your shares and the future growth potential of your portfolio.
What is Texas Instruments's cash yield?Texas Instruments’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for Texas Instruments to continue to grow, or at least, maintain its current operations. There are two methods I will use to evaluate the quality of Texas Instruments’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Along with a positive operating cash flow, Texas Instruments also generates a positive free cash flow. However, the yield of 4.1% is not sufficient to compensate for the level of risk investors are taking on. This is because Texas Instruments’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Is Texas Instruments's yield sustainable?Can Texas Instruments improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. Over the next two years, Texas Instruments’s operating cash flows is expected to grow by a double-digit 13.26%, which is encouraging, should capital expenditure levels maintain at an appropriate level. Below is a table of Texas Instruments’s operating cash flow in the past year, as well as the anticipated level going forward.
|Current||+1 year||+2 year|
|Operating Cash Flow (OCF)||US$6.59b||US$6.88b||US$7.46b|
|OCF Growth Year-On-Year||4.44%||8.45%|
|OCF Growth From Current Year||13.26%|
Given a low free cash flow yield, on the basis of cash, Texas Instruments becomes a less appealing investment. This is because you would be better compensated in terms of cash yield, by investing in the market index, as well as take on lower diversification risk. However, cash is only one aspect of investing. Now you know to keep cash flows in mind, I suggest you continue to research Texas Instruments to get a better picture of the company by looking at:
- Valuation: What is TXN worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether TXN is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Texas Instruments’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.
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