Since Berkshire’s recent 13F showed an ownership of Taiwan Semiconductor, it made me want to dig deeper into the company. TSMC is one of the largest integrated circuit fabricators in the world, and one of the few that can mass produce the most cutting edge chips. In this post I will try to get a high level overview of TSMCs capital allocation by studying their use of cash.
Cash Flow Summary
The first place to look in order to get a high level understanding of TSMCs capital allocation is to look at their main uses of cash for the past several years. Cash from operations seemed stable from 2017-2019, but has been growing at a high rate the past few years. The cash from operations in the first 9 months of 2022 is already approximately equal to the 2021 value.
Looking at the operating cash flow numbers, and some of the other line items discussed later, it seems like TSMCs recent results can be split into two regimes: the 2017-2019 period, then the 2020-present that had much higher growth.
Cash spent on investments was initially about 50% of cash from operations, but lately it has grown to about 70%. Clearly investments have been ramping up.
Cash outflows for financing grew modestly and peaked in 2019. Since then, cash from financing has deviated from its norm. As we’ll see later, this is due to TSMC issuing debt that counteracted their dividend payments.
Finally, 2017 and 2018 saw minimal changes in the net cash position of the company. The net change in cash was moderately negative in 2019 due to the increased investments. Since then, TSMC has been building cash from increased operating cash flow and debt issuance.
| 9 Months 2022 | 2021 | 2020 | 2019 | 2018 | 2017 | |
| Cash from Operations | 38,374 | 40,200 | 29,280 | 20,520 | 18,670 | 19,670 |
| Cash from Investing | (29,972) | (30,2300) | (18,000) | (15,310) | (10,220) | (11,300) |
| Cash from Financing | (4,454) | 4,940 | (3,150) | (8,990) | (7,970) | (7,250) |
| Net Change in Cash | 7,889 | 14,630 | 7,290 | (4,080) | 794 | 407 |
Cash from Investing
The biggest component to TSMCs cash from financing is capital expenditures. Taiwan Semi has been expanding manufacturing capacity by building new fabs. Additionally, the company has to constantly upgrade machinery and existing fabs to handle each new generation of transistor sizes. Capex was consistent in 2017 and 2018, then showed a decent increase in 2019 and 2020. TSMC greatly increased capex spend in 2021, and looks to rival that spend in 2022. A deeper dive would be required to see if TSMC generates high returns from their investments in capital expenditures.
The other main line items in the cash from investing are the purchase and sale of investments. These two line items generally cancel each other out, as if TSMC is rolling over bonds or rebalancing their stock portfolio. However, so far in 2022, Taiwan Semi has purchased more investments than what they have disposed of.
| 9 Months 2022 | 2021 | 2020 | 2019 | 2018 | 2017 | |
| Capital Expenditures | (25,470) | (30,330) | (18,050) | (15,360) | (10,270) | (11,110) |
| Purchase of Investments | (5,900) | (9,367) | (9,509) | (8,622) | (3,230) | (3,500) |
| Sale of Investments | 2,112 | 9,536 | 9,510 | 8,247 | 2,930 | 2,950 |
| Cash from Investing | (28,972) | (30,230) | (18,000) | (15,310) | (10,220) | (11,300) |
Cash from Financing
Now to look at Taiwan Semiconductor’s use of cash for financing. TSMC was paying off about $1B in debt in 2017 and 2018, then debt payments trickled in 2019. Debt issuance largely increased in 2021, coinciding with the large capex spend. The change in debt so far in 2022 shows a modest increase in debt.
TSMCs long term debt to equity ratio comes in at 0.3, and their D/EBIT is about 0.97. These debt ratios indicate that Taiwan Semi has pretty low amounts of debt, implying that they have not grossly misallocated capital in the past.
As for returning capital to shareholders, TSMC has done practically no share buybacks. Interestingly, they diluted investors a bit by issuing stock in 2021. It would be worth investigating if the proceeds were used fund investments, or something else like stock based compensation.
Instead of buying back stock, Taiwan Semi has been steadily paying dividends. The company has roughly paid dividends that amount to about 30% of operating cash flow. With this modest payout, it seems TSMC is caught between returning capital to shareholders, while also reinvesting in the business.In my opinion, if the company is growing at a high rate, and heavily reinvesting in the business with high incremental returns, they should minimize their dividend payments.
| 9 Months 2022 | 2021 | 2020 | 2019 | 2018 | 2017 | |
| Net Change in Debt | 2,600 | 14,440 | 6,240 | (124) | (1,120) | (1,030) |
| Issuance of Equity | 0 | 341 | 0 | 0 | 0 | 0 |
| Repurchase of Equity | (30) | (4) | 0 | (3) | (3) | (4) |
| Dividend Paid | (7,306) | (9,610) | (9,230) | (8,650) | (6,750) | (6,100) |
| Cash from Financing | (4,454) | 4,940 | (3,150) | (8,990) | (7,970) | (7,250) |
Conclusion
The main takeaways from this quick analysis is that Taiwan Semiconductor has greatly increased cash from operations over the past few years, while also ramping up capital expenditures. I found it interesting that TSMC focuses solely on dividends to return cash to shareholders, instead of performing buybacks. Some next steps to dig deeper into TSMCs capital allocation is to get a better handle of what their capex spending goes towards, and to take a look at their R&D spend to see if that has been a driver for growth.