TECHNOLOGY

This technology stock has laid out a strategy to shed its money-losing business, which should lead to stronger cash flow and revenues, suggests John Dessauer, editor of John Dessauer's Outlook.

Texas Instruments (TXN) raised its dividend and narrowed guidance for the third quarter. Management now expects sales of $3.15 billion to $3.29 billion, and earnings of $0.51-$0.55 a share.

The new guidance is in line with analysts' expectations. Texas Instruments' stock price is up 41% this year. That is an excellent performance, especially considering that many analysts had very low expectations for this year.

Argus Research rates the stock as hold, with earnings estimates of $1.78 for this year and $2.10 for 2014.

Standard & Poor's analysts say buy, with a $42 stock price target. Their earnings estimates are $1.76 for this year and $2.29 for 2014.

The differing 2014 estimates reflect respective opinions on 2014 profit margins and sales.

Here is what analysts at Standard & Poor's have to say: “Our buy opinion reflects our confidence in TXN's transformation to a predominantly analog-based company. We think this transition will generate higher margins, cash flow, and returns to shareholders.

TXN is shedding its money-losing wireless business that will wind down this year. Its analog products should deliver gross margins in the high 50% to low 60% area, by our analysis—above its current gross margin of 52%.

The company has laid out a strategy whereby it should generate a sustainable percentage of free cash flow of 20%-25% of revenue that it intends to use for share repurchases and higher dividends. Given the low customer and product risk we see, we find the business model attractive.

For the second time this year, Texas Instruments has raised the dividend. This time, the raise is to $0.39 per share per quarter, up from $0.28. In the quarter, Texas Instruments spent $721 million buying back stock and $301 million on dividends.

Texas Instruments is financially very strong and is an attractive long-term investment, with only moderate risk. The $1.20 annual dividend provides a yield of 3.0%. Buy Texas Instruments on any temporary market weakness to $38 or lower.

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