Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Texas Instruments Incorporated (NASDAQ:TXN) is about to go ex-dividend in just 2 days. Investors can purchase shares before the 29th of October in order to be eligible for this dividend, which will be paid on the 16th of November.
Texas Instruments's next dividend payment will be US$1.02 per share. Last year, in total, the company distributed US$4.08 to shareholders. Looking at the last 12 months of distributions, Texas Instruments has a trailing yield of approximately 2.7% on its current stock price of $149.96. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! As a result, readers should always check whether Texas Instruments has been able to grow its dividends, or if the dividend might be cut.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Texas Instruments paid out more than half (67%) of its earnings last year, which is a regular payout ratio for most companies. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the last year it paid out 64% of its free cash flow as dividends, within the usual range for most companies.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Fortunately for readers, Texas Instruments's earnings per share have been growing at 15% a year for the past five years. Texas Instruments is paying out a bit over half its earnings, which suggests the company is striking a balance between reinvesting in growth, and paying dividends. Given the quick rate of earnings per share growth and current level of payout, there may be a chance of further dividend increases in the future.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Texas Instruments has increased its dividend at approximately 24% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
To Sum It Up
Is Texas Instruments worth buying for its dividend? It's good to see earnings are growing, since all of the best dividend stocks grow their earnings meaningfully over the long run. However, we'd also note that Texas Instruments is paying out more than half of its earnings and cash flow as profits, which could limit the dividend growth if earnings growth slows. In summary, while it has some positive characteristics, we're not inclined to race out and buy Texas Instruments today.
On that note, you'll want to research what risks Texas Instruments is facing. For example, we've found 2 warning signs for Texas Instruments that we recommend you consider before investing in the business.
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. 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.
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