Chuck Darwin<p>And — oh, here’s an interesting cash windfall — <a href="https://c.im/tags/Texas" class="mention hashtag" rel="tag">#<span>Texas</span></a> <a href="https://c.im/tags/Instruments" class="mention hashtag" rel="tag">#<span>Instruments</span></a> raised about 💥$2.5 billion by selling stock over these five years. </p><p>Wait, what? </p><p>Selling stock, not buying stock? ⁉️</p><p>Selling stock to whom? </p><p>Hold that thought …</p><p>Put it all together and I figure the company generated about $25 billion in truly free cash flow over this 5-year span. ‼️</p><p>What is management going to spend this treasure chest on?</p><p>Well, surely you’re going to spend a healthy amount on <a href="https://c.im/tags/capital" class="mention hashtag" rel="tag">#<span>capital</span></a> <a href="https://c.im/tags/expenditures" class="mention hashtag" rel="tag">#<span>expenditures</span></a>, right? </p><p>I mean, you took a $5.2 billion depreciation and amortization charge over this time span, <br />and we all know that semiconductor manufacturers need to stay on that bleeding edge of technological innovation to keep earnings growing in the future, right?</p><p>Nope. </p><p>Texas Instruments spent $3.3 billion on fixed assets from 2014 through 2018, one-third of that total in 2018. </p><p>Some significant proportion of that was maintenance capex as opposed to growth capex.</p><p>Well, if you didn’t spend your money on property, plant and equipment, then surely you spent a healthy sum in <a href="https://c.im/tags/MandA" class="mention hashtag" rel="tag">#<span>MandA</span></a>, right?</p><p>Nope. $1.6 billion over five years. Tuck-in stuff.</p><p>I guess you were paying down debt, then. <a href="https://c.im/tags/Deleveraging" class="mention hashtag" rel="tag">#<span>Deleveraging</span></a> up a storm, right?</p><p>Nope. Paid down debt by $500 million a year in 2014, 2015 and 2016, but increased debt by $500 million in 2017 and $1 billion in 2018.</p><p>So it’s <a href="https://c.im/tags/dividends" class="mention hashtag" rel="tag">#<span>dividends</span></a>, right? This is where all the cash went?</p><p>Now we’re getting there: <br />⭐️$9.1 billion in dividends over five years. A healthy direct return of capital to shareholders.</p><p>But it’s just a warm-up to the main event: </p><p>$15.4 billion in <a href="https://c.im/tags/buying" class="mention hashtag" rel="tag">#<span>buying</span></a> <a href="https://c.im/tags/back" class="mention hashtag" rel="tag">#<span>back</span></a> <a href="https://c.im/tags/stock" class="mention hashtag" rel="tag">#<span>stock</span></a> from 2014 through 2018.</p><p>⭐️Between stock buybacks and dividends, that’s $24.5 billion in cash “returned to shareholders”, </p><p>essentially 100% of the free cash flow generated by the company over the past five years.❗️</p><p>Now here’s the kicker.</p><p>What sort of share-count reduction would you think that this $15.4 billion in buybacks gets you? </p><p>I mean, that is the logic here, that investing $15.4 billion in the company’s own stock is the best possible capital allocation that the company can make.</p><p>I would have guessed that surely<br /> $15.4 billion would retire anywhere from 20% to 25% of the shares outstanding over this time frame, <br />with the stock price ranging from $40 to $100.</p><p>♦️In truth, Texas Instruments retired only 10% of its outstanding diluted shares with its $15.4 billion investment, <br />going from 1.1 billion shares to 990 million shares.</p><p>⚠️But wait, there’s more.</p><p>From 2014 through 2018, Texas Instruments bought back 228.6 million shares for $15.4 billion. </p><p>That works out to an average ♦️purchase price of $67.37.</p><p>Over that same span, Texas Instruments sold 90.8 million shares to management and board members as they exercised options and restricted stock grants, for a total of $2.5 billion. </p><p>That works out to an average ♦️sale price of $27.51. </p><p>⚠️The difference in average purchase price and average sale price, multiplied by the number of shares so affected, is $3.6 billion.</p><p>🔥In other words, 40% of Texas Instrument’s stock buybacks over this five-year period <br />🧨were used to sterilize stock issuance to senior management and the board of directors, who received $3.6 billion in direct value from these buybacks.👀</p><p>♦️But wait, there’s more …</p><p>As of Dec. 31, 2018 there were still 40 million shares outstanding in the form of options and restricted stock grants to management and directors, <br />at an average weighted exercise price of $55. </p><p>At today’s stock price, that means an additional $2.6 billion in stock-based compensation has already been awarded.</p><p>Well golly, these surely must have been <a href="https://c.im/tags/amazing" class="mention hashtag" rel="tag">#<span>amazing</span></a> <a href="https://c.im/tags/managers" class="mention hashtag" rel="tag">#<span>managers</span></a> and directors to warrant that sort of stock-based compensation in addition to their cash compensation.</p><p>This is the performance of Texas Instruments (in white) and the iShares PHLX Semiconductor ETF (in gold) over the same five years. </p><p>Texas Instruments is the fifth-largest position in that ETF and that underlying index, with a 7.1% weight.</p><p>⚠️For the past five years, Texas Instruments has been nothing more than a tracking stock for a passive semiconductor index. </p><p>🆘And for this privilege, shareholders have rewarded management and directors with<br />💰 $6.2 billion in stock, plus a couple of billion in cash compensation.</p><p>‼️That’s why it’s never been a better time in the history of the world to be a senior manager of a publicly traded company.</p><p>It’s a crying shame, because here’s the thing … the total return on owning Texas Instruments is, in fact, 👉15% higher than the ETF over this five-year span.</p><p>❇️Because of the dividend.</p><p>Do you want to run your company for cash generation? </p><p>Do you want to return that cash to shareholders? </p><p>Great!</p><p>➡️ Use a special dividend, not buybacks.</p><p>There, fixed it for you.</p><p> <a href="https://c.im/tags/financialization" class="mention hashtag" rel="tag">#<span>financialization</span></a> <a href="https://c.im/tags/Share" class="mention hashtag" rel="tag">#<span>Share</span></a> <a href="https://c.im/tags/buybacks" class="mention hashtag" rel="tag">#<span>buybacks</span></a></p><p><a href="https://www.epsilontheory.com/yeah-its-still-water/" target="_blank" rel="nofollow noopener noreferrer" translate="no"><span class="invisible">https://www.</span><span class="ellipsis">epsilontheory.com/yeah-its-sti</span><span class="invisible">ll-water/</span></a></p>