Please ensure Javascript is enabled for purposes of website accessibility

Is Texas Instruments Stock a Buy?

By Nicholas Rossolillo – Jun 28, 2020 at 11:29AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

For slow-and-steady tech dividend payments, it’s hard to argue against this chip-making giant.

Semiconductors are by no means new technology, but even though they are a near-omnipresent part of life today, it's still a growth industry. If all-out innovation and growth within chips is what you're looking for, Texas Instruments (TXN 0.16%) isn't the right stock. However, this old stalwart still has plenty to offer, especially if striking a balance between growth and investment income is the name of your game.

A cool hand in tough times

A lot has changed in a matter of months. More than just a health and economic catastrophe, COVID-19 is creating a "new normal." Whatever that may look like after the dust settles is anyone's guess, but one early trend is emerging: Digital-based business is here to stay.

That bodes well for Texas Instruments (TI) and the rest of the industry. As the basic building blocks for all things tech, semiconductor companies haven't had the wind taken out of their sails by uncertain economic times. If anything, many of them have gotten a boost in demand. Fellow chip giant Broadcom said on its latest earnings call that it was having a hard time keeping up with orders in some segments of its business. 

Granted, TI has a very different business model. Many of its end customers have been deeply impacted by the current crisis, most notably in the areas of auto and smartphone manufacturing. Auto and phone sales are seeing falling consumer interest at the moment, and a recovery may not happen for these two important segments until 2021. As a result, TI's first-quarter results showed year-over-year declines.  

Metric

Q1 2020

Q1 2019

Change

Revenue

$3.33 billion

$3.59 billion

(7.4%)

Earnings per share

$1.24

$1.26

(1.6%)

Free cash flow

$690 million

$856 million

(19.4%)

Data source: Texas Instruments. Table by author.

However, as explained by my colleague Billy Duberstein, TI has been in crises before and dusted off its 2008 to 2009 Great Recession playbook during its first-quarter earnings call. The company's efficient production and big profit margins will go a long way toward helping it ride out the turbulence. And while the second quarter guidance wasn't great, a wide 22% to 4% expected sequential drop in revenue from last quarter could be worse.  

A group of people walking through a semiconductor fabrication facility.

Image source: Texas Instruments.

Generous cash returns

Back to the bottom line for a moment. Even in a bad quarter, TI generated $690 million in free cash flow (revenue less cash operating and capital expenses). It's a volatile quarterly metric, but it gives investors a true sense of how profitable a company is. And a 21% free-cash-flow margin in a bad quarter is nothing to balk at. Over the last 12 months, TI's free cash flow of $5.64 billion is good for a whopping margin of 40%.  

Talk about efficiency. And where does all that cash go? The company keeps the equivalent of at least 10% of annual revenue in liquid assets. With $4.74 billion in cash and equivalents at the end of March 2020, that box is checked. As for the free cash flow itself, TI has a long-standing policy of returning all of it to shareholders. That comes in the form of a dividend (which currently yields 2.9% annually) and share buybacks (which totaled $1.64 billion in the first quarter). Those buybacks explain how earnings per share fell only 2% even though revenue fell 7%.

In spite of some expected headwinds for at least the rest of this year, it may be surprising that TI stock is close to breakeven with where it started 2020. And trading for 20.1 times trailing 12-month free cash flow doesn't exactly make it a value like it was back in late March during the worst of the market meltdown. Nevertheless, premium pricing goes with the territory. As the world eventually heals from the coronavirus, TI's business will rally. And along the way, it generates ample cash for research and development, the improvement of its chip manufacturing processes, and the return of excess capital to investors. If a stable income play in the tech industry is what you're after, this one is a worthy addition.

Nicholas Rossolillo owns shares of Broadcom Ltd. The Motley Fool owns shares of Texas Instruments. The Motley Fool recommends Broadcom Ltd. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Texas Instruments Incorporated Stock Quote
Texas Instruments Incorporated
TXN
$160.71 (0.16%) $0.25
Broadcom Limited Stock Quote
Broadcom Limited
AVGO
$464.75 (0.54%) $2.49

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
327%
 
S&P 500 Returns
105%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.