Texas Instruments Inc. (NYSE: TXN) announced a 31 percent increase in quarterly dividend from $0.13 to $0.17, resulting in a dividend yield of 2.5 percent. Jefferies believes there is room for the dividend to go higher.

The company said the dividend hike reflects the strategic shift of its product portfolio to a greater percentage of analog and embedded processing technologies, which generate high returns on investment and strong cash flow.

The new quarterly cash dividend will be payable Nov. 21 to shareholders of record on Oct. 31, contingent upon formal declaration by the board of directors at its regular meeting in October.

This is the eighth consecutive year that Texas Instruments has increased its dividend. The company has paid dividends to its shareholders without interruption since June 1, 1962.

We view the 31 percent increase as a reflection of Texas Instruments' confidence in its cash flow generation, and believe there is room for the dividend to go higher, said Mark Lipacis, an analyst at Jefferies. We expect the higher dividend to have a positive impact on the valuation multiple.

Now at 2.5 percent dividend yield (including this increase), Texas Instruments has the sixth-highest dividend yield in his semiconductor coverage universe.

Lipacis views the dividend hike as a sign that the management is confident in its analog strategy and cash flow generation capabilities. He estimates the dividend at 26 percent of his estimated fourth quarter of 2011 free cash flow and 23 percent of his estimated 2012 FCF, so the company has room to raise it further.

Texas Instruments lowered expectations for the second time this year on Sept. 8, which resulted in consensus lowering its next 12 months earnings per share by 9 percent and a total cut of 16 percent from peak earnings per share anticipated in June 2011.

He noted that the third quarter of 2011 would be the fifth consecutive quarter of below-seasonal growth.

We continue to like Texas Instruments' analog growth story, and expect the company to continue to increase its share. We also expect its gross margins to expand by 300 basis points by the end of calendar 2012, said Lipacis.

The brokerage reiterated its buy rating on shares of Texas Instruments with a price target of $35. The brokerage increased its 2011 revenue estimate to $13.46 billion from $13.45 billion, its 2012 estimate to $13.24 billion from $13.18 billion and its 2013 estimate to $16.40 billion from $15.33 billion.

Texas Instruments stock closed Thursday's regular trading up 1.61 percent at $27.71 on the NYSE, while in the after-hours the stock rose 1.34 percent to $28.08.