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Is Texas Instruments Stock a Buy?

By John Ballard - Sep 24, 2020 at 8:35AM

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This chipmaker is as solid as they come.

Texas Instruments ( TXN -0.10% ) has been around since 1930, so its business has been time-tested through many industry cycles and economic downturns. This time, it's the pandemic that's cutting into its results -- both revenue and operating profit were down year over year in the second quarter. However, there are several reasons why this is one of the best tech stocks to own for the long haul.

Competitive advantages

The semiconductor veteran sells analog and embedded processors for a variety of uses. Industrial and automotive applications, including factory automation and infotainment systems in cars, are its largest markets, comprising more than half of the business. Chips that go into personal electronics like mobile phones and tablets account for 23% of its revenue.

A circuit board.

Image source: Getty Images.

Texas Instruments faces lots of competition in these markets, from rivals both small and large. But there are several factors working in its favor that have allowed the company to consistently generate a healthy stream of free cash flow, much of which it distributes to shareholders in the form of dividends.

The company has tremendous product breadth. It can meet the needs of any consumer electronics manufacturer in the world. Because of this, TI.com gets more traffic than any of its competitors. 

That wide product portfolio, in turn, generates many opportunities to grow revenue. The company's diversity across markets means it is not overly dependent on a single technology or customer for its revenue. This allows management to better plan its strategy and guide the company's growth.

These advantages are reflected in Texas Instruments' high operating margins, which have been improving in recent years. Even with revenue down over the last year due to softness in the automotive market, the company still generated free cash flow of $5.7 billion, equivalent to 41.7% of revenue. 

The company recently increased its quarterly dividend by 13% to $1.02 per share, extending its streak of annual dividend increases to 16 years. One key to that run has been management's shift in capital allocation to more profitable products, such as analog and embedded processors. And management continues to push the envelope on margin expansion with its ongoing transition to 300-millimeter wafers, which currently provide roughly half of its analog revenue and generate higher gross margins than its 200-millimeter wafer chips. 

Focused on long-term growth

This is a well-managed business. Management makes its decisions like true owners, focusing on the long term. It has also navigated the COVID-19 crisis well, maintaining short lead times on products to support its customers' needs, which has been crucial in this period of uncertainty and supply chain disruptions.

Most of Texas Instruments' 12% decline in second-quarter revenue can be attributed to a more than 40% decline in its automotive business, a market that remains soft. That was partially offset by rising demand from the work-from-home crowd, which drove revenues from its personal electronics products about 10% higher year over year. 

Despite the challenging environment, Texas Instruments remains focused on investing for the future. In the short term, management mentioned on the recent earnings call it will maintain investments in research and development and new enhancements for TI.com.  

Texas Instruments is also investing to expand its manufacturing capacity for the 2022 to 2025 time frame. This is in preparation for the rising demand that management anticipates for its products as the automotive and broader industrial sectors, among others, increase the semiconductor content of their own products and boost the level of automation in their factories.  

TXN Total Return Price Chart

Data by YCharts.

A dependable stock

Texas Instruments is not a high-flying technology stock, and it's not priced like one. It trades at a trailing price-to-earnings multiple of 25.8, though it looks somewhat cheaper on a price-to-free-cash-flow basis, with a multiple of 22.7.  

At current share prices, its dividend yields 2.9% -- above average for the S&P 500 -- and the company paid out just over half of its free cash flow to shareholders over the last four quarters. 

Investors are getting one of the most shareholder-friendly companies around with Texas Instruments, which should continue to deliver market-beating returns over the next decade.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Texas Instruments Incorporated Stock Quote
Texas Instruments Incorporated
TXN
$193.38 (-0.10%) $0.20
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S&P 500 Index - Price Return (USD)
^GSPC
$4,538.43 (-0.84%) $-38.67

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