Efficient chipmaker poised for growth despite trade wars

Like all U.S. chipmakers, this stock must take into account U.S. tariffs that threaten to disrupt trade links to China.

Still, this company benefits from increased efficiencies at its plants and productive research spending. The shares have more than doubled in five years, despite a temporary dip in reaction to the announcement of U.S. tariffs on China. The company recently raised its dividend and added to its share buyback plan.


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TEXAS INSTRUMENTS INC. (Nasdaq symbol TXN; www.ti.com) is a leading maker of analog chips that convert inputs, such as touch, sound and pressure, into the electronic signals computers can understand. Those products account for 66% of the company’s overall sales.

Texas Instruments gets a further 23% of its revenue from embedded processor chips, which perform mathematical calculations. The remaining 11% of revenue comes from other chips, calculators and licensing of the company’s technology to other firms.

Revenue rose 6.9%, from $12.2 billion in 2013 to $13.1 billion in 2014; it then fell to $13.0 billion in 2015 before rising again to $13.4 billion for 2016. Revenue climbed higher for 2017, reaching $15.0 billion.

Earnings jumped 86.8%, from $2.0 billion in 2013 to $3.7 billion in 2017. Due to fewer shares outstanding, earnings per share gained 106.3%, from $1.75 to $3.61. If you factor out a charge related to changes in the U.S. tax code, the company earned $4.36 a share in 2017. Sales and earnings both reached new highs in 2017.

The company’s gross profit margin (gross profits as a percentage of revenue) rose to 64.3% in 2017 from 61.8% for 2016.

Dividend Stocks: Earnings per share up 24.7% in the most recent quarter

In the quarter, ended March 31, 2018, revenues increased 11.4%, to $3.8 billion from $3.4 billion a year earlier. That was due to strong demand from industrial and automotive clients.

Earnings jumped 37.0%, to $1.37 billion, or $1.35 a share, in the first quarter to $997.0 million, or $0.97 a share, a year earlier. Excluding a charge related to U.S. tax reforms, earnings per share rose 24.7%, to $1.21 from $0.97.

A big part of Texas Instruments’ earnings growth comes from investments in chipmaking equipment to improve the efficiency of its manufacturing plants. The company spent $385.0 million (or 10.2% of its sales) on research in the first quarter. That’s up 4.3% from $369.0 million (or 10.9% of sales) a year earlier.

Texas Instruments can easily afford those investments. As of March 31, 2018, its long-term debt of $3.6 billion was a low 3% of its market cap. It also held cash of $4.1 billion, or $4.17 a share.

The company recently raised its quarterly dividend by 24.0%, to $0.62 a share from $0.50. The new annual rate of $2.48 yields 2.2%.

At the same time as it raised its dividend, the company also added $6.0 billion to its share repurchase authorization. It can now buy back up to $10.6 billion of its shares. There are no time limits for these purchases. It spent $873 million on share repurchases in the first quarter of 2018.

The shares are up 202.5% over the past five years and have largely recovered from a recent dip over concerns about U.S.-China tariffs. That dispute threatens to disrupt sales and earnings for all U.S. chipmakers.

Texas Instruments trades at 20.6 times the company’s likely 2018 earnings of $5.46 a share, a reasonable level considering its high research spending,

Recommendation in TSI Dividend Advisor: Texas Instruments is a buy.

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