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Takeaway: Take a closer look at Texas Instruments.

In a macro environment where investors are rotating into the largest capitalization stocks, Hedgeye Semiconductors sector head Craig Berger likes TXN as the top mega-cap stock in his sector.  TXN just raised their dividend from 30 cents to 34 cents, a 13% increase, to now yield 2.7%.  Despite having raised their dividend numerous times, Berger says TXN still only pays out 35% of their free cash flow, giving them lots of room to increase dividends again in the future. The firm is also repurchasing much stock on the open market.

Texas Instruments: A Top Mega-Cap Long in Chip Sector | $TXN - 78t

TXN compares favorably to the other giant names in the space: Intel (INTC) earnings have already grown meaningfully, could be toppy, and are vulnerable to ongoing deterioration in PC demand.  The other biggest name in the Semiconductor space is QCOM. Berger is also constructive on QCOM given strength in iPhone 6 and 6 Plus smartphone shipments (where QCOM supplies the main communications processor), but Berger says “QCOM is in the penalty box in China” as the Chinese ramp their protectionist policies and push to stimulate domestic Chinese production. Given the size and scope of the Chinese consumer, this could be an ongoing headwind to QCOM shares.

TXN doesn’t have the China exposure that QCOM has, and it is also not tied to the PC market the way INTC is.  After buying a Japanese memory manufacturing facility for pennies on the dollar, TXN’s production capacity is only 2/3 utilized.  Berger says this investment could pay off huge, as TXN is now the only in-house producer of larger 300mm (12-inch) analog wafers, giving them a global leading cost structure. Their sizable cash flow generation and underutilized capacity make TXN a possible large-scale acquirer.  They could gobble up a big competitor and push all this production through their existing fabrication capacity.  Even with added personnel and manufacturing costs, Berger says 80 cents of each incremental dollar would drop right to TXN’s bottom line.  In a market that’s looking for quality mega-cap names, TXN looks like it has all the ingredients.