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Is Texas Instruments Stock a Buy?

By Will Healy - Mar 19, 2020 at 8:00AM

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Shares trade at a discount, but uncertainty looms large for markets all over the world.

Texas Instruments (TXN -0.90%) has served as one of the few long-term bellwethers of the tech industry. It delivered shareholder returns over decades and has continued to do so in the last few years.

However, revenue took a hit in late 2019 as China trade issues and economic challenges in specific sectors pressured Texas Instruments stock. Just when shares recovered, coronavirus-related fears caused them to fall sharply with the broad market.

This situation forces investors to make a choice. They must decide if this depressed pricing presents an opportunity to buy into a long-term winner or whether these are only the early innings of more pain to come.

China dependence hurt the company even before coronavirus

In its fourth-quarter earnings report, the Dallas-based producer of analog and embedded chips saw revenue decline by 10% year over year. That followed an 11% decline in the third-quarter. 

Man in protective glasses holding a semiconductor chip in a blue, gloved hand by a microscope.

Image source: Getty Images.

The company blamed trade tensions for the shortfall, but while Texas Instruments faltered in the third quarter, Taiwan Semiconductor posted strong results. This may indicate that Texas Instruments "bet on the wrong horse." The company derives 36% of its revenue from the industrial sector, 23% from personal electronics, and 21% from the automotive industry. This contrasts with Taiwan Semiconductor, which earns its revenue primarily from smartphones and high-performance computing. 

To make matters worse, with the fallout from the coronavirus becoming more apparent, investors will have to brace for additional hits to revenue and earnings.

The stock is down by more than 17% year to date as of this writing.

A reliable long-term investment

Tech is a fast-moving industry. When investors think of tech stocks in the semiconductor industry, names such as NVIDIA, Taiwan Semiconductor, or Intel usually garner more attention.

Still, investors should continue to keep an eye on Texas Instruments. Shares have more than quadrupled over the past decade, easily outperforming the S&P 500 over the same period.

TXN Chart

Data by YCharts.

Texas Instruments also rewards investors in other ways. They should take note of the dividend, particularly the 16-year streak of dividend increases. Its almost 3.9% yield far outpaces the broad market average, currently at around 2.4%.

Moreover, the payout ratio of over 60% shows what percentage of earnings the company returns to shareholders in the form of dividends. In 2019, Texas Instruments generated $5.8 billion of free cash flow with dividend payouts making up approximately half that amount. The company also had enough cash for $3 billion of share repurchases during the year.

Investors should consider the other strengths in this business. The company boasts over 100,000 customers, and its chips go into tens of thousands of devices. Even if its automotive division suffers short term, its involvement in self-driving vehicles points to a major opportunity as this technology becomes more common.

Adapting to new markets is nothing new for Texas Instruments -- it once boasted an extensive consumer products division that has been reduced in scope. And the company has made mistakes in the past such as missing out on the PC revolution. Still, it was resilient enough to recover and build a massive customer base outside of PCs. While investors understandably want to see signs that the company is adapting to key trends going forward, its long history bodes well for the future.

Should I buy TXN now?

While the case to stay in Texas Instruments stock remains strong, it does not necessarily support buying the stock now. Shares trade at 21 times forward earnings estimates, in line with the broad market average. However, analysts estimate both revenue and earnings will decline in 2020. With worldwide economic upheaval prompted by the coronavirus, results could easily come in even worse than what management and analysts expect.

The market will eventually move past any coronavirus or trade-related fears. And in the company's current position, its generous dividend remains a source of stability for shareholders. Nonetheless, conditions are too uncertain at this time, and investors wanting to start a position in Texas Instruments stock are better off on the sidelines for now.

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Stocks Mentioned

Texas Instruments Incorporated Stock Quote
Texas Instruments Incorporated
TXN
$152.78 (-0.90%) $-1.38
Intel Corporation Stock Quote
Intel Corporation
INTC
$37.29 (-1.30%) $0.49
Taiwan Semiconductor Manufacturing Company Limited Stock Quote
Taiwan Semiconductor Manufacturing Company Limited
TSM
$83.65 (-0.82%) $0.69
NVIDIA Corporation Stock Quote
NVIDIA Corporation
NVDA
$155.42 (-2.75%) $-4.40

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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