I am not a tech-savvy investor, but I do love a good dividend-paying stock. So Texas Instruments (TXN -0.58%) has long been on my wish list, given its nearly two decades' worth of annual dividend hikes. When the dividend yield rose to historically high levels in 2022, I jumped in, and everything I have heard since, including the fact that the cyclical chip market is in a lull, has made me very happy I did.
A rare sale
Great companies are seldom put on the sale rack, so you have to move when they end up there. That's basically what I believe took place earlier in 2022 when the dividend yield on Texas Instruments' shares rose to 3%. That's the upper end of its historical yield range. The problem is that, more often than not, dividend yields don't hit historically high levels randomly.
Image source: Getty Images.
In the case of Texas Instruments, the problem today is that the chip sector is facing a pullback. That's not shocking at all, however, since the industry tends to be quite cyclical. However, what I've heard since adding the stock to my portfolio has only made me happier that I held my nose and bought the stock during this chip industry slowdown.
Doing the right things
There are multiple ways to deal with industry downturns. At the extremes, a company can pull in its horns and hope to survive, or it can decide to take advantage of the hard times and invest in the future. Texas Instruments has embarked on a capital investment plan to increase its production capacity by spending roughly $3.5 billion a year between 2022 and 2025 on new chip plants. It intends to come out of this downturn a better company, which is exactly the type of thing I like to see.
To be fair, Texas Instruments has an edge here. The company's primary products are very simple chips that go into just about everything digital. To put a number on that, Texas Instruments has over 100,000 customers. And its chips have a decade-long shelf life, so even if inventory starts to build up, it can be patient as it awaits the next industry upturn. In fact, given the breadth of customers it has, Texas Instruments actually likes to hold inventory because it believes it is best positioned to allocate chips to the areas where they are most needed.
NASDAQ: TXN
Key Data Points
While I may barely know how to use all the power of my iPhone, I know as an investor that these are the types of things that differentiate good companies from middling or bad companies. And the big picture here is that technology, and thus chips are finding their way into just about every aspect of life. Even the cooking thermometers used to check a Thanksgiving Day turkey have chips these days! As a result, demand for chips is far more likely to keep rising than to fall.
So Texas Instruments' counter-cyclical capital investment plans appear well placed to me even though the spending will be a drag on financial results at a time when earnings are expected to be weak.
What the future could hold
The moves Texas Instruments is making remind me of steel giant Nucor (NUE +0.10%), which also has a long history of putting money to work in industry downturns. I've owned Nucor for years, so I know this approach can work in cyclical markets.
Although the two companies are vastly different in many ways, the ability to see the long-term and go against the grain, even though it draws the ire of short-term-minded Wall Street, makes them very similar from a management perspective. And Nucor, for reference, has increased its dividend for around 50 consecutive years. So if Texas Instruments continues to make smart investment decisions, I don't see why it can't achieve a similar level of dividend success.
If you don't own Texas Instruments, you might want to take a close look today.
