On Thursday, Texas Instruments held a Webcast to update its Capital Management Strategy, and raised its targeted free cash flow range to 20% to 30% of revenue. Previously, the Dallas-based firm had targeted 20% to 25% of revenue. Texas Instruments sees "quite a bit of room" to continue buying back shares, Theflyonthewall.com reported.
Analysts welcomed the new free cash flow target. Jefferies, which has a 'buy' rating on the company, raised its price target to $52 from $50 following the announcement. Companies such as Intel (INTC), On Semiconductor (ONNN) and Xilinx (XLNX) could make similar moves, according to Jefferies analyst Mark Lipacis.
"We believe investors will continue to reward companies that emulate TXN's best practices with premium multiples, just as they have with TXN. We think INTC, ONNN, and XLNX are best positioned to surprise on capital return, he wrote."
BMO Capital Markets also raised its Texas Instruments price target to $50 from $43. "We continue to rate TXN outperform," wrote BMO analyst Ambrish Srivastava, noting that the new strategy is a sign of confidence in Texas Instruments' business model.
Free cash flow is crucially important for generating healthy dividends and share repurchases. Texas Instruments' free cash flow for the full year of 2013 was $3 billion, or 24% of revenue. The company returned just over $4 billion to shareholders in the form of dividends and share repurchases during fiscal 2013.
"Yesterday, Texas Instruments held a conference call to discuss its capital management strategy," wrote J.P. Morgan analyst Christopher Danely, in a note released on Friday. "TI continues to demonstrate secular increases in margins and an outstanding payout ratio, as the company raised its target free cash flow margin range and modified its 100% payout ratio target to include proceeds from equity exercises."
J.P. Morgan reiterated its 'overweight' rating on Texas Instruments, citing the company's "superior margin and earnings leverage".
In recent years Texas Instruments has shifted its focus away from legacy wireless offerings, towards more lucrative analog and embedded processing products. The chipmaker beat Wall Street's revenue forecast in its fourth-quarter results in January, but announced large job cuts in its Japanese operations and its Embedded Processing business.
In an interview Texas Instruments CFO Kevin March told TheStreet that the job cuts were born out of the company's need to shift resources to faster growing areas.
Shares of Texas Instruments have climbed 27.49% over the last 12 months, but were off 1.04% at $44.52 in pre-market trading.
--Written by James Rogers in New York.
>Contact by Email.