Texas Instruments (TXN -1.81%) is best known for analog and embedded chips that go into everything from factory equipment and cars to medical devices and power systems. After a choppy stretch for its semiconductors, the Dallas-based manufacturer has begun to show clearer momentum this year while keeping its focus on long-term cash generation and consistent shareholder payouts. That combination -- improving fundamentals and dependable capital returns -- puts the shares back on my buy list for October.
It also helps that the company just sweetened its income story. In mid-September, Texas Instruments lifted its quarterly dividend by 4% to $1.42 per share, marking 22 consecutive years of increases. Trading at about $183 as of this writing, that works out to a dividend yield a touch above 3%. For a high-quality chipmaker with wide end-market exposure, that's compelling.
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Momentum is returning
The company's latest earnings update showed evidence of a cyclical recovery taking hold. Second-quarter revenue came in at about $4.45 billion, up 16% year over year and 9% sequentially. Capturing its profitable model, gross margin was roughly 58%, with operating margin near 35%.
Under the hood, the business mix looked healthier. Revenue from its analog and embedded processing segments grew 18% and 10% year over year, respectively, with sales to the industrial market growing at a year-over-year rate in the upper teens and sales to the automotive market rising at a rate in the mid-single digits.
Texas Instruments CEO Haviv Ilan framed the backdrop plainly during the second-quarter earnings call: "The semiconductor cycle is playing out. Cyclical recovery is continuing, while customer inventories remain at low levels."
That read-through -- low customer inventories alongside improving turns -- supports the idea that orders can stay resilient as the sector normalizes.
Management also reiterated its long-standing financial north star. As CFO Rafael Lizardi put it, the objective is "long-term growth of free cash flow per share." That lens drives the company's heavy 300-mm manufacturing investments, designed to widen structural cost advantages over time. Near term, those fabs keep capital expenditures elevated; over a multi-year horizon, however, they should support higher margins and more cash to return to shareholders.
Looking ahead, management guided third-quarter revenue to a range of $4.45 billion to $4.8 billion, signaling steady demand even after a strong June quarter.
A reasonably priced compounder
Trading at about 34 times earnings, the stock isn't a bargain. But context matters.
First, earnings are temporarily depressed by the industry cycle and by the company's outsized investment program; using today's trough as the denominator can, in a way, overstate the price-to-earnings multiple in the context of the broader cycle. Second, with a balance of pricing power, scale manufacturing, and broad industrial and auto exposure, Texas Instruments has historically converted a high share of revenue into free cash flow, providing key support for a shareholder-friendly dividend that has grown every year for more than two decades.
But there's a reason the stock hasn't performed well this year. The company's third-quarter outlook -- while solid -- reflected some caution after June's strength, including the possibility of China pull-ins that may not repeat. Additionally, geopolitics and tariffs can reshape demand patterns for some regions. And, of course, the multi-year spend on new capacity weighs on near-term free cash flow and could prove mistimed if the recovery stalls. But those risks look manageable against the company's manufacturing flexibility, inventory position, and diversified end-markets.
Even when considering the risks, Texas Instruments looks like a good investment idea. It is emerging from the downcycle with improving revenue trends, expanding gross margin, and there's a clear line of sight to stronger cash generation as utilization climbs. Further, the dividend, now $1.42 per quarter, offers a starting yield of approximately 3% and is supported by a long history of increases, with potential for continued growth as free cash flow normalizes.
