Texas Instruments' Capital Allocation Update Signals Confidence in 2018

Texas Instruments (NASDAQ: TXN) is one of the most shareholder-friendly companies around, due to its emphasis on prudent capital allocation. This focused policy and transparency have paid off in recent years, as Texas Instruments posted strong growth, while also returning large amounts of cash to shareholders in the form of dividends and share repurchases.

Recently, Texas Instruments made some updates to its capital allocation policy for 2018, tweaking some of its annual targets. Here are the important changes, and what they could mean for shareholders in the upcoming year.

Long-term strategy update

The first change the company made was to write out its long-term objectives for each capital allocation category, not merely give a numerical annual target. The short sentences explain the rationale behind each target so that shareholders will know how the numbers fit into the company's overall strategy. Here are the updated policies:

2018 targets versus 2017

The company also provided actual 2017 results versus targets, as well as new targets for 2018. Here is what Texas Instruments targeted in 2017, what it achieved, and the new targets for the upcoming year:

The major changes in 2018 are:

1. Free cash flow margin: Increased by 5% from 2017 guidance, which management attributed to U.S. tax reform. It should be noted that the actual 2017 free cash flow came in above the high end of the company's 2017 guidance, despite spending more on capital expenditures this year than forecast. The free cash generation of the business is already incredibly high at 31.2%, which management attributes largely to its strong end markets and 300-mm wafer production capacity. As most of its competitors produce chips on smaller 200-mm wafers, Texas Instruments has a 40% cost advantage at production, which translates into an 800 basis-point gross margin advantage.

1. Inventory: The company is targeting slightly greater inventory in 2018, in order to maintain higher levels of customer service, as well as to get greater visibility into end demand. The end inventory levels are only slightly elevated in the forecast, so I don't think this is anything particularly to worry about.

1. Dividend payout: The dividend policy has been clarified to 40% to 60% of current-year free cash flow, changed from 50% to 80% of trailing four years' free cash flow. Management did this to simplify the metric for analysts and shareholders. Texas Instruments' current dividend payout ratio is 46.7%.

All in all not much has changed at Texas instruments -- only that it anticipates better margins, more free cash flow, and even greater transparency with shareholders. For those looking for safety in this volatile market environment, Texas Instruments may fit the bill.

10 stocks we like better than Texas InstrumentsWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Texas Instruments wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of February 5, 2018

Billy Duberstein owns shares of Texas Instruments. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.