Texas Instruments (TXN -0.06%) has raised its dividend every year since 2004. Between 2004 and 2021, the diversified chipmaker also grew its free cash flow (FCF) per share by an average of 12% annually while reducing its number of outstanding shares by 46%.
If you had invested $10,000 in TI at the beginning of 2004, your shares would be worth about $52,000 today. If you had reinvested your dividends as well, your investment would now be worth more than $75,000. Let's see why TI generated such consistent returns over the past 18 years, and if it will remain a reliable blue chip stalwart for the foreseeable future.
How did Texas Instruments evolve?
Texas Instruments emerged in 1951 from the remnants of an older seismic exploration services company called Geophysical Service. It went public in 1953, and invented the world's first silicon transistor and transistor radio the following year. Over the following decades it expanded its business and manufactured a much broader range of chips for a wide range of markets.
In 2011, TI became the world's largest supplier of analog chips after acquiring National Semiconductor for $6.5 billion. In 2012, it abandoned the mobile application processor market, which was quickly being taken over by Qualcomm, and focused on producing less capital-intensive analog and embedded chips instead.
TI's chips are cheaper than CPUs or GPUs, but they provide crucial power management, wireless, and data processing features for consumer electronics, cars, industrial machines, and communications infrastructure. Those devices generally require a higher number of TI's chips with every upgrade cycle. That secular demand has been particularly strong in the auto and industrial markets, which together contributed 62% of its revenue in 2021.
Over the past several years, TI has also been transitioning from 200 mm to 300 mm wafers, which will reduce its production costs by about 40%. If we track TI's gross margin expansion over the past 10 years, we can clearly see the benefits of its transition toward cheaper chips and 300 mm wafers. Those strategies have also enabled it to maintain much higher margins than other major chipmakers like Intel and Qualcomm.
Between 2011 and 2021, TI's annual revenue rose from $13.74 billion to $18.34 billion, which represents a compound annual growth rate (CAGR) of only 3%, but its earnings per share (EPS) increased at a CAGR of 16%. It squeezed out that strong earnings growth from its slower revenue growth by implementing its margin-boosting strategies and constant buybacks.
Over the past 12 months, TI spent 62% of its FCF on dividends and 12% on buybacks, which supports its long-term strategy of returning most of its FCF to its investors. It currently pays an attractive forward dividend yield of 3%.
Plenty of room for future growth
TI's stock tumbled nearly 20% this year as investors fretted over its slowing growth, its spending plans for new 300 mm plants, and the near-term macro headwinds for the auto, industrial, and consumer electronics markets.
However, that pessimism has also reduced TI's forward price-to-earnings ratio to 17. That makes it a bit pricier than Intel and Qualcomm, which trade at 11 and 10 times forward earnings, respectively. But TI arguably deserves that slight premium because its business is more broadly diversified and less capital-intensive than either of those industry peers.
TI might remain out of favor this year as rising rates drive investors away from all tech stocks, but I firmly believe it will recover in the future and generate solid returns for long-term investors. I'm not sure if it can replicate its impressive multibagger gains from the past two decades, but it should continue to grow as its core markets consume more analog and embedded chips.