Better Dividend Stock: Texas Instruments vs. Intel

Texas Instruments (TXN -1.23%) and Intel (INTC -1.79%) are both blue-chip semiconductor stocks that are often owned for stability and income instead of aggressive growth. But which of these chipmakers is actually a better long-term investment for dividend investors? Let's compare their core businesses, growth rates, and valuations to decide.

The similarities and differences 

Texas Instruments and Intel are both integrated device manufacturers (IDMs) that manufacture their chips at their own foundries.

This makes them different from "fabless" chipmakers that outsource their production to third-party contract chipmakers. However, both chipmakers still outsource a small portion of their non-core chips -- like TI's embedded chips and Intel's discrete GPUs -- to third-party foundries.

Image source: Getty Images.

TI mainly provides analog and embedded chips for the automotive, industrial, consumer electronics, and communications markets.

Intel's x86 CPUs, which generate most of its revenue, power most PCs and servers worldwide. TI's chips are cheaper and less powerful than Intel's CPUs, but they're essential for power management, data transfer, and wireless communication features across myriad devices.

Which chipmaker is growing faster?

TI and Intel serve different markets with different types of chips, but their top- and bottom-line growth have remained similar over the past five years:

Source: YCharts

The pandemic generated headwinds for TI by disrupting its automotive and industrial markets. However, the crisis generated tailwinds for Intel as stay-at-home trends and the surging usage of cloud-based services boosted its sales of PC and data center CPUs. Those headwinds and tailwinds have been gradually waning in a post-lockdown market.

But over the next few years, TI and Intel's paths could diverge. TI will likely benefit from a growing appetite for more chips in the auto and industrial markets as companies launch more connected vehicles and robots. Its gross margins should also continue to rise as it continues its shift from 200mm to 300mm wafers, which will cut its long-term production costs by about 40% but squeeze its near-term operating margins.

Meanwhile, Intel faces stiff competition in the x86 CPU market from AMD (AMD 0.69%) and its manufacturing partner Taiwan Semiconductor Manufacturing Company (TSM -4.86%), also known as TSMC.

Intel has fallen behind TSMC in the "process race" to manufacture smaller and denser chips at its first-party foundries in recent years, and it plans to significantly ramp up its spending on new plants to close that gap by 2025.

Based on these facts, analysts seem much more optimistic about Texas Instrument's near- and mid-term growth in 2022 and 2023:

Data source: Yahoo Finance, March 31.

The valuations also reflect that optimism: TI trades at 21 times forward earnings, while Intel has a lower forward price-to-earnings ratio of 15.

But what about the dividends?

TI pays a forward dividend yield of 2.5%, which is slightly lower than Intel's forward yield of 2.8%. But TI has also raised its dividend annually for 18 consecutive years, which easily beats Intel's eight-year streak of dividend hikes. TI also aims to return "all" of its free cash flow (FCF) to investors via buybacks and dividends, a pledge Intel has never made.

Over the past 12 months, TI and Intel spent 62% and 58% of their FCF, respectively, on their dividends. Those reasonable cash dividend payout ratios indicate both companies still have plenty of room for future hikes.

However, those dividends could still be affected by the rising capex requirements of their plant upgrades. TI plans to spend about $3.5 billion on capex each year through 2025 to expand its 300mm plants, which would represent a mid-teens percentage of its projected revenue.

Meanwhile, Intel plans to spend a whopping $26 billion -- or nearly 36% of its projected revenue -- on capex in 2022 as it desperately tries to catch up to TSMC and Samsung in the process race. I don't expect TI's spending plans to disrupt its dividend, but Intel's aggressive spending plans (and repeated pleas for government subsidies) suggest its dividend is on shakier ground.

The clear winner: Texas Instruments

Texas Instruments and Intel might initially seem similar, but the former is a more reliable investment than the latter because it's better diversified, it faces fewer direct competitors, and its business isn't as capital intensive.

TI might trade at a higher valuation and pay a slightly lower yield, but I firmly believe it will generate higher total returns than Intel over the next few years after factoring in its price appreciation and reinvested dividends.