Wednesday, December 13, 2017

Texas Instruments 3 year Dividend Growth 27.45%

I just love to go to a stock's website and be greeted with a statement that the company places significant emphasis on maintaining and increasing my income.   Texas Instruments, symbol TXN, is one of those companies.  I am going to add TXN today.

  • 4.7% Revenue Growth over past 3 years
  • 27.45% Dividend Growth over past 3 years
  • Low D/E (debt to equity ratio) of .28

"The ultimate measure for any enterprise is superior long-term growth
 of free cash flow."  Rich Templeton Chairman, President and CEO
- Rich Templeton, chairman, president and CEO



Texas Instrument Dividend History

I will start with the looking at Texas Instruments dividend history.  Look at the chart below and you will how TXN has stuck to its knitting and delivered on the promise of returning money to the investors.

Notice some important points in this chart.   The "dot com" crash occurred right at the time TXN started paying out dividends.    Yet, they were able to pay and increase.  

Then look at 2007 - 2009 when the entire market suffered a major disruption.  However, many stocks not only continued their dividends but increased their dividend twice.  For an income investor like me, I like that kind of history.

Texas Instrument Yield

Dividend increases are not the only metric I use when I pick a stock for a Dividend Machine portfolio.   I need a minimal yield and that is what TXN delivers, a minimal yield for me.  At 2.5% TXN, like my previous stock pick this week BBT, just beats the 10 year U.S. Treasury which is about 2.4% today.  However, I have run the numbers so many times and if you have a long horizon, dividend growth beats a high yielder.   Lets look at the facts.

On a theoretical basis you need a dividend growth rate of just about 16% for 6 years to obtain the same income you would have if you bought a stock with a 5.3% yield and dividend growth of 2.71% per year like At&t (T) delivers.   See the table below.

When I apply the same math to a comparison of At&t and TXN with a lower yield (2.5%) but a much higher dividend growth rate (27.45%) the results are stunning.  See the table below.


Texas Instrument all Dividend Machine Fundamentals 

The additional data I use when picking a Dividend Machine are displayed in the table below.  Earnings per share beat dividend paid out, revenue growth is solid and the D/E ratio of .28 as compared with industry standard of .33 makes for a solid company.

My Take

Two types of income investors read this blog.  Some need current yield.  They make valid arguments for this approach.  Other income investors concentrate on dividend growth.  They too make valid arguments as to why this is a better strategy. 

The decision to buy high yielders versus high growers has many moving parts, your age for instance as well as your personal cash flow cushion.

I like TXN because it does beat the 10 U.S. Treasury but is highly likely to double my income in just a few short years. 

M* MoneyMadam

Disclosure Long TXN

Sunday, December 10, 2017

Justifying BBT for the 2017 Dividend Machine Portfolio

  • Interest rate increases should benefit banks

  • Inflation remains tame.

  • BB&T has the fundamentals needed to be a stock in the 2017 Portfolio

One of the old rules investors follow is that a progressive interest rate curve where longer rates are higher than shorter rates favors banks.  The reason is because a bank can lend money and receive higher income on that loan than they pay to the saver who deposited the money.   The spread is the bank's profit.

Image result for 2017 yield curve

Inflation conundrum 

While we are told that the Federal Reserve will continue to gradually raise rates, we are also told there is basically no inflation.  

Most ordinary investors find this counter intuitive.  When interest rates go up we expect inflation.   But inflation has a lot of moving parts.  Going back to old adages, simply stated, inflation is defined as too much money chasing too few goods. 

United States Inflation Rate
The answer to the question of why inflation is technically hard to find is because of globalization. We do not have too few goods.  We have lots of goods and lots of money. Yet, interest rates are still going to be raised by the Fed.  and the upcoming raises should benefit banks.

BBT Dividend Machine Fundamentals

Therefore, I move onto the fundamentals of BB&T bank (symbol BBT) to support why I am adding this stock to my 2017 Dividend Machine Portfolio.

To review, I require a stock to deliver more income than I can get from a 2 year U.S. Treasury.  After all, stock investing is riskier than U.S. Treasuries, so you must demand more income.  BBT meets that goal, not by a lot but it does.  Currently the 2 year U.S. Treasury is paying about 2.3%.

Earnings per share (EPS) must be greater than dividend paid out.  Some investors like to use free cash flow and I encourage all investors to gather as much information as possible when they pick a stock investment.  I use EPS because I write for the ordinary investor and EPS is an easy value to find and understand.

Dividend and revenue growth are very important.  With or without formal measures of inflation, readers of this blog know that I concentrate on my future cash flow needs and I know my expenses will go up.  Therefore, a solid history of dividend growth is critical.

Like dividend growth, revenue growth is very important.  I looked at a lot of bank stocks and one of the main reasons I picked BBT is their revenue growth.

Finally, a good balance sheet lets me sleep at night.  It is not fail safe (just ask the owners of G.E.) but it is helpful.  I like a D/E ratio of 1 or less or within industry standard. MSN pegs industry standard D/E at .87.


Notice that BBT meets all the criteria.  It is not a growth or momentum stock and therefore I would not expect covered call options.  However, I have owned BBT for a while and I have sold a few calls over time.

I am long BBT and I added on Friday.  I still need to invest about $14,000 to complete my goal of investing $100,000 in Dividend Machines in 2017 and time is running short.  As with all my portfolios, I will track this performance and report on it periodically.   You can follow this portfolio by clicking on the Portfolio pages for 2017.

M* Money Madam

Disclosure:  Long BBT

Friday, December 1, 2017

Costco or Target - you decide

What an interesting decision. A lot of bloggers have recently weighed in on this conundrum.  I applied my Dividend Machine fundamentals to help decide which is the better stock for me.    But frankly that analysis made the decision no easier.  I will post the Dividend Machine data comparison at the end of this post.    

Business Model Differentiation

These two retailers differentiate their business by their business model.  Target is dependent on profit margins which are 3.8% right now.  Costco also has positive profit margins at 2.08% but Costco uses membership fees to fill their coffers. In 2016 COST pulled in $2.6 billion in membership fees.  These fees help to smooth out their revenue stream.  

Target, on the other hand, is totally dependent on making money through margins.  Target must make money on their merchandise and they are pretty good at it.  However, their sales are not growing.

For me, the real question is a trade off surrounding yield, revenue trends and value.

Dividend Yield

Dividend Yield would seem to be straight forward.  On first inspection, Target (TGT) wins with a yield of 4.38% versus Costco’s (COST) 1.09%.   However, over the past five years Costco has delivered three special dividends that are substantial.   

Will COST be able to continue this trend of special dividends?   If they do continue to accumulate cash and share it with investors through special dividends, their meager regular dividend yield looks more tolerable.

Take a look at Costco's and Target's quarterly cash & equivalents for the past 5 quarters.


Both stocks have increasing amounts of cash on their balance sheet. If you are paying for cash, you can see why COST is so much more expensive than TGT.

Revenue trends

Over the past few years, I have been using revenue trends prominently when working my income portfolio.   Sales drive revenues which drive the cash flow needed to pay dividends.   

A lot can happen on the way from revenue collection to dividend payout but without revenue, nothing will flow to the investor.  The table below presents a comparison of TGT and COST revenues.  



Clearly COST is the winner on this metric.  If this kind of revenue growth continues, future special dividends just maybe in the works.   TGT, on the other hand has stagnant revenues more like Walmart (WMT.)   However, you pay dearly for that revenue growth and that is where valuation comes into play.


Costco is expensive.  COST is up today based on recent earnings and a euphoric market.  COST sports a P/E ratio (price to earnings ratio) of 30.   Whereas, Target is considered cheap.  Target (TGT) interestingly is down today.  Current P/E ratio is 13.  This is quite a difference.   If COST has a bad quarter, the stock could take quite a hit.   However, without revenue growth, we are not going to see TGT stock price increase without some other catalyst.

The table below shows a few additional measures to take into consideration when looking at value. 

The metrics that stand out are Book Value and Peg Ratio.   Investopedia is the source of this definition of Book Value:  " It serves as the total value of the company's assets that shareholders would theoretically receive if a company were liquidated."

Target's book value as related to the cost of each share of stock ($60.91) is better than Costco's book value based on a share price of $183.45. is the source of this definition of PEG ratio:  "The PEG ratio is the Price Earnings ratio divided by the growth rate. The forecasted growth rate (based on the consensus of professional analysts) and the forecasted earnings over the next 12 months are used to calculate the PEG." Learn More

A low PEG ratio may indicate a stock is undervalued and higher PEG ratio can suggest over value.  To me, I am still confused as to which stock is better.

Debt to Equity Ratio

Readers of my blog know I place a lot of emphasis on balance sheet and I find D/E ratio one of the easier measures for ordinary investors to find and to understand.   Neither stock’s D/E is onerous like Home Depot’s D/E ratio of 12, but one is better than the other.

Industry average D/E ratio is .54.  Costco carries a D/E ratio of .61.  Target’s D/E ratio is 1.01.  Both stocks have the cash flow necessary to meet their obligations with neither company in danger of going belly up due to too much debt.

Dividend Machine Fundamentals Table

My Take

So here we are having to decide to buy an expensive low yield stock with the potential to deliver a big income payday or to buy a high yielding, cheap, slow growth stock (value trap.)    I am going to buy both, but I may wait for COST to correct after today’s significant rally.  Target has calls that will return 11% if called away so I will wade in with that strategy. 

Only you can decide what works for you.  I am an income investor and I like to be paid to wait.  I also like to juice my income with covered calls.  Oddly, the usual technique of selling calls to boost income is available on the faster growing, lower yielding stock.  That is not the case with COST versus TGT.  But again, nothing about this seems to be normal.

M* MoneyMadam

Disclosure:  Long TGT with calls:  expect to buy COST 

Posting note:  Bought TGT at $59.50 and sold January $62.50 call for $1.50.