When it comes to semiconductor companies, few are as well run as Texas Instruments (TXN 1.77%). The company's capital allocation strategies are second to none, and the company continues to post strong quarterly results.
It reported third-quarter earnings on Tuesday, Oct. 25, and there are three things savvy investors must know about this company while examining the earnings results. If you keep these items in mind, it'll be clear what investors should do with the stock.
1. Texas Instruments is investing in the future
Texas Instruments isn't satisfied with being the go-to company for analog and embedded semiconductors used in nearly every digital product. Instead, it will heavily invest in its U.S. manufacturing capabilities by spending $3.5 billion annually through 2025 and 10% of revenue from 2026 to 2030.
This reinvestment plan stayed on course in the third quarter, with Texas Instruments' trailing-12-months spending increasing to $3.1 billion in capital expenditure projects. Texas Instruments anticipates these investments will contribute about 7% annual revenue growth from 2030 and beyond, so this capability is a big deal.
Image source: Texas Instruments.
Still, Texas Instruments grew revenue by 13% year over year in Q3, so this quarter's growth wasn't hard to come by. Unlike some tech companies, Texas Instruments is highly profitable, so a large chunk of that revenue made its way down through its income statement.
2. Rewarding shareholders is a top priority
Texas Instruments posted $2.3 billion in net income in Q3, good enough for a 44% profit margin and 18% year-over-year growth, outpacing sales growth. That means Texas Instruments is getting more efficient, despite ramping up capital expenditures.
Management isn't hoarding most of this income; instead, it's rewarding shareholders through stock buybacks and dividends. In Q3, Texas Instruments paid over $1 billion in dividends and repurchased just shy of $1 billion in stock. Altogether, the amount of cash returned to shareholders increased 72% over last year.
With the annual dividend totaling $4.96, the stock's dividend yield is a respectable 3.2%. A dividend level that high for a well-managed company is rare (it's only risen above 3% a handful of times over the past 35 years), and investors should use this opportunity to pick up some shares.
However, it's not all sunshine and rainbows for Texas Instruments.
3. Short-term headwinds are coming
Perhaps the most disappointing part of Texas Instruments' quarter was its guidance. For Q4, management expects revenue to come between $4.4 billion and $4.8 billion. Compared to last year's Q4 revenue of $4.83 billion, management doesn't expect to grow 2022's Q4 revenue, even in the best-case scenario.
Likewise, for earnings per share (EPS), management's guidance ranged from $1.83 to $2.11 compared to EPS of $2.27 in 2021. The primary catalyst for this weakness stems from personal electronics, which makes sense considering the consumer is becoming more cost-conscious with an impending recession. However, Texas Instruments is also starting to see cracks in its industrial business.
These projections aren't great for investors to hear, but they are unavoidable due to our economic environment. Considering Texas Instruments was founded in 1930, it's been through about every economic environment imaginable. So while the downturn may be an annoyance, it's just a bump in the road when investors zoom out to a long-term view.
With the stock now trading for about 16 times earnings, Texas Instruments' stock is very cheap, especially compared to the S&P 500's price-to-earnings ratio of 20. Texas Instruments represents a top-notch value and will reward shareholders through a handsome dividend payment while the company deals with some economic headwinds. With the stock down over 20% from its high, now could be an excellent opportunity to invest in Texas Instruments.
