I'm not a technology guru, but as a longtime investor, I understand business models fairly well. That is why I am so confident that Texas Instruments (TXN 0.12%) is well positioned for the future, despite some near-term headwinds. Indeed, the company is more of a widget maker than many of its highly specialized peers. Here's what that means and why that makes the historically high 2.9% dividend yield so attractive.
There's nothing special about these chips
Although this is a simplification, there are just a couple of different types of microchips. Really specialized chips that function as the "brains" of a computer are the type that most people think about. Companies like Intel make those. Then there are chips that have really simple functions, like recognizing a button push. Basically, these chips allow humans to interact with their devices. This is the type of chip that Texas Instruments specializes in.
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Both types of chips are important, and both are likely to see huge demand in the future as the world gets increasingly more digital. However, there's a massive amount of change in specialized chips and very little change in the simple ones over time. This is an important distinction because it means that a company like Intel is always investing in research and development to keep up with its competitors. When a new, high-functioning chip comes out, competitors have no choice but to bring out chips that can match the new technology.
Simple chips don't change all that much. Once a chip plant is built, it can run for years, making the exact same product. What differentiates competitors is their ability to reliably provide customers with good chips. With a $150 billion market cap, Texas Instruments is a global giant in the space where it competes. And, because it has in-house production, it has more control over production than some of its peers (many chip companies just design products and hire other companies to make them).
Texas Instruments' inventory conundrum is no big deal
Demand for chips tends to be cyclical, and right now, demand is soft. That makes some sense, as consumers worried about rising rates have pulled back on buying technology items like cellphones. That has resulted in investors selling chip stocks like Texas Instruments, which, as noted, has pushed its yield up toward historical highs.
NASDAQ: TXN
Key Data Points
During the company's second-quarter earnings conference call, the word "inventory" was used nearly 30 times. The company highlighted that inventory, at $3.7 billion, amounted to around 207 days of supply. Analysts were clearly worried that this level of inventory was too high. And yet the company wasn't at all fazed by it and is in the process of building more chip plants, which could make the issue worse over time.
Long-term investors need to remember the type of chips Texas Instruments makes. According to management, a chip can sit for 10 years on a shelf. So the company doesn't necessarily need to move products as fast as it can. More important is making sure that it can reliably supply its customers. That is becoming even more important because Texas Instruments has been working to increase its direct-to-customer sales, meaning the need for inventory is higher than it was before (when customers bought from a middleman who held the inventory).
Much ado about nothing
Texas Instruments has 80,000 products that it sells to 100,000 customers. Its simple chips are vital to the products we use but aren't really subject to technology developments that make more complex chips obsolete over time. Building up inventory today isn't exactly a great thing, but it isn't terrible, either, since its chips don't "go bad." When demand picks up again, the company's inventory levels are likely to balance out. If you are looking at Texas Instruments and aren't a tech-focused investor, the inventory issue that Wall Street analysts are talking about just isn't as important as they might have you believe.
And that's a huge opportunity for dividend investors because the stock's roughly 3% yield is toward the high end of Texas Instruments' historical yield range. That suggests the shares are cheap today. If you can think long term, this tech icon could be a great portfolio addition, even if you don't normally invest in technology stocks.
