# Texas Instruments Inc. (TXN)

## Dividend Discount Model (DDM)

Intermediate level

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Dividends are the cleanest and most straightforward measure of cash flow because these are clearly cash flows that go directly to the investor.

### Intrinsic Stock Value (Valuation Summary)

Texas Instruments Inc., dividends per share (DPS) forecast

US\$

Year Value DPSt or Terminal value (TVt) Calculation Present value at 13.32%
0 DPS01 2.63
1 DPS1 3.13 = 2.63 × (1 + 18.90%) 2.76
2 DPS2 3.66 = 3.13 × (1 + 16.95%) 2.85
3 DPS3 4.21 = 3.66 × (1 + 15.00%) 2.89
4 DPS4 4.75 = 4.21 × (1 + 13.05%) 2.88
5 DPS5 5.28 = 4.75 × (1 + 11.10%) 2.83
5 Terminal value (TV5) 264.52 = 5.28 × (1 + 11.10%) ÷ (13.32%11.10%) 141.54
Intrinsic value of Texas Instruments Inc.’s common stock (per share) \$155.75
Current share price \$131.70

Based on: 10-K (filing date: 2019-02-22).

1 DPS0 = Sum of the last year dividends per share of Texas Instruments Inc.’s common stock. See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

### Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 2.23% Expected rate of return on market portfolio2 E(RM) 11.40% Systematic risk of Texas Instruments Inc.’s common stock βTXN 1.21 Required rate of return on Texas Instruments Inc.’s common stock3 rTXN 13.32%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

3 rTXN = RF + βTXN [E(RM) – RF]
= 2.23% + 1.21 [11.40%2.23%]
= 13.32%

### Dividend Growth Rate (g)

#### Dividend growth rate (g) implied by PRAT model

Texas Instruments Inc., PRAT model

Average Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (US\$ in millions)
Dividends declared and paid 2,555  2,104  1,646  1,444  1,323
Net income 5,580  3,682  3,595  2,986  2,821
Revenue 15,784  14,961  13,370  13,000  13,045
Total assets 17,137  17,642  16,431  16,230  17,722
Stockholders’ equity 8,994  10,337  10,473  9,946  10,390
Financial Ratios
Retention rate1 0.54 0.43 0.54 0.52 0.53
Profit margin2 35.35% 24.61% 26.89% 22.97% 21.63%
Asset turnover3 0.92 0.85 0.81 0.80 0.74
Financial leverage4 1.91 1.71 1.57 1.63 1.71
Averages
Retention rate 0.51
Profit margin 26.29%
Asset turnover 0.82
Financial leverage 1.70

Dividend growth rate (g)5 18.90%

Based on: 10-K (filing date: 2019-02-22), 10-K (filing date: 2018-02-22), 10-K (filing date: 2017-02-23), 10-K (filing date: 2016-02-24), 10-K (filing date: 2015-02-24).

2018 Calculations

1 Retention rate = (Net income – Dividends declared and paid) ÷ Net income
= (5,5802,555) ÷ 5,580 = 0.54

2 Profit margin = 100 × Net income ÷ Revenue
= 100 × 5,580 ÷ 15,784 = 35.35%

3 Asset turnover = Revenue ÷ Total assets
= 15,784 ÷ 17,137 = 0.92

4 Financial leverage = Total assets ÷ Stockholders’ equity
= 17,137 ÷ 8,994 = 1.91

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.51 × 26.29% × 0.82 × 1.70 = 18.90%

#### Dividend growth rate (g) implied by Gordon growth model

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × (\$131.70 × 13.32% – \$2.63) ÷ (\$131.70 + \$2.63) = 11.10%

where:
P0 = current price of share of Texas Instruments Inc.’s common stock
D0 = the last year dividends per share of Texas Instruments Inc.’s common stock
r = required rate of return on Texas Instruments Inc.’s common stock

#### Dividend growth rate (g) forecast

Texas Instruments Inc., H-model

Year Value gt
1 g1 18.90%
2 g2 16.95%
3 g3 15.00%
4 g4 13.05%
5 and thereafter g5 11.10%

where:
g1 is implied by PRAT model
g5 is implied by Gordon growth model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 18.90% + (11.10%18.90%) × (2 – 1) ÷ (5 – 1) = 16.95%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 18.90% + (11.10%18.90%) × (3 – 1) ÷ (5 – 1) = 15.00%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 18.90% + (11.10%18.90%) × (4 – 1) ÷ (5 – 1) = 13.05%