Texas Instruments (NASDAQ:TXN) Will Pay A Larger Dividend Than Last Year At $1.42

The board of Texas Instruments Incorporated (NASDAQ:TXN) has announced that the dividend on 12th of November will be increased to $1.42, which will be 4.4% higher than last year's payment of $1.36 which covered the same period. This will take the dividend yield to an attractive 3.0%, providing a nice boost to shareholder returns.

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Texas Instruments' Payment Could Potentially Have Solid Earnings Coverage

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before making this announcement, the company's dividend was much higher than its earnings. This situation certainly isn't ideal, and could place significant strain on the balance sheet if it continues.

Over the next year, EPS is forecast to expand by 53.9%. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 74% which brings it into quite a comfortable range.

View our latest analysis for Texas Instruments

Texas Instruments Has A Solid Track Record

The company has an extended history of paying stable dividends. The dividend has gone from an annual total of $1.36 in 2015 to the most recent total annual payment of $5.44. This implies that the company grew its distributions at a yearly rate of about 15% over that duration. Rapidly growing dividends for a long time is a very valuable feature for an income stock.

The Dividend's Growth Prospects Are Limited

The company's investors will be pleased to have been receiving dividend income for some time. Although it's important to note that Texas Instruments' earnings per share has basically not grown from where it was five years ago, which could erode the purchasing power of the dividend over time. The earnings growth is anaemic, and the company is paying out 98% of its profit. Limited recent earnings growth and a high payout ratio makes it hard for us to envision strong future dividend growth, unless the company should have substantial pricing power or some form of competitive advantage.

Texas Instruments' Dividend Doesn't Look Sustainable

In summary, while it's always good to see the dividend being raised, we don't think Texas Instruments' payments are rock solid. Although they have been consistent in the past, we think the payments are a little high to be sustained. We would be a touch cautious of relying on this stock primarily for the dividend income.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. For example, we've identified 2 warning signs for Texas Instruments (1 doesn't sit too well with us!) that you should be aware of before investing. Is Texas Instruments not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.