Texas Instruments (TXN 1.25%) sounds about as boring as the handheld calculators that made it a household name in the 1970s, but it's been a solid investment over the decades, and today the company's focus on specialized chips seems likely to ensure its continued viability in the future.
The Dallas-based computing stalwart, founded in 1951, is still growing revenue, earnings, margins, and cashflow at an impressive clip. It's also returning more of its fortunes to shareholders, recently announcing a 13% increase in its annual dividend.
A business unto itself
Texas Instruments makes specialty chips for electronics designers and manufacturers worldwide, a focus that gives it a wide and stable economic moat, according to Morningstar analysts. Competitors can't easily encroach upon its business because these products require unique engineering and customer relationships that take years to develop.
Image source: Texas Instruments.
Among its many products, including its iconic calculators, the company makes analog chips that convert real-world conditions into digital signals. They communicate measurements such as temperature, speed, sound and electrical current for digital electronics so they can communicate with the real world. Texas Instruments also makes embedded processors -- specialized microprocessors used to control electrical or mechanical functions in all kinds of devices.
Texas Instruments's semiconductors are widely used in the automotive industry and in ubiquitous power management systems, helping the company consistently rank among the world's top 10 semiconductor producers. These specialty chips carry higher margins than typical memory chips, and they're in wide demand.
By the numbers
Texas Instruments has been reporting impressive financial results. For the second quarter, it posted $4.58 billion in revenue, a 41% increase year over year. In a press release, the company attributed the gains to "strong demand in industrial, automotive, and personal electronics."
Net income was up 40% to $1.93 billion. The company hasn't announced the release date for its third-quarter earnings, but it's estimated to be on Oct. 19. Its guidance for the third quarter, however, was in about the same range as its second quarter, leaving some market observers uninspired for the moment. It's important to note, though, that the company has a history of underpromising and overdelivering on guidance. Over the long term, the company's likely to continue its cash-gushing ways.
Texas Instruments has returned $3.9 billion to shareholders over the last year through dividends and stock repurchases. The company has raised dividends for 17 consecutive years from 2004 to 2020, by an annual average of 26%. It also has reduced its share count by 46% during that same period, raising the value of outstanding shares.
As generous as the company has been to shareholders, it's not stretching its balance sheet to do so. The company says it has enjoyed 12% annual growth in free cash flow per share from 2004 through 2020.
Risks of doing business
Texas Instruments boasts a strong balance sheet and a wide economic moat, two factors that give any company plenty of wiggle room.
Its primary risks are related to production and shifts in market demand for its products. This includes the costs of raw materials, utilities, and manufacturing equipment and services. The chip industry overall, for instance, is still trying to overcome shortages and supply chain disruptions from the pandemic.
Another risk for Texas Instruments is that it must always keep pace with technological innovations, since it supplies the circuits for ever-improving electronics. It has done so for years, but in an industry characterized by disruptors, that's always a high-risk pursuit.
For what it's worth
Texas Instruments currently trades around $200 per share, with a 12-month-trailing price-to-earnings ratio of nearly 28. That's well below some of its peers, such as Advanced Micro Devices (AMD 2.44%) with a PE of 38, and Broadcom (AVGO 2.02%) with a PE of over 37. But valuations are all over the map in this industry. Chip giant Nvidia (NVDA 3.65%) has a PE of nearly 77, while Intel (INTC -0.38%) carries a PE of about 12.
Texas Instruments also has one of the highest price-to-sales ratios among the large chipmakers, but that's to expected with a more specialized line of products, and it has the highest profit margins of all the chipmakers at over 40%.
For the long-term investor, Texas Instruments has survived the test of time, keeping pace with unpredictable technological disruptions for decades, and it's well-positioned for repeat performances in the future.
As a mature company that is still increasing revenues and earnings, and sharing its largess through dividends, it offers a rare combination of safety, steady income and growth.
